How much to reducing the principal balance

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1. In purchasing a house that is worth $175,000, you need to obtain a mortgage. Suppose you choose a 30- year fixed rate mortgage with an interest rate/year of 9.74%. What is the annual payment required? How much of each year’s payment goes to paying interest and how much to reducing the principal balance?

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2. Due to a recession, expected inflation this year is only 3.5%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.5%. Assume that the expectations theory holds and the real risk-free rate (r*) is 3.25%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 3.25%, what inflation rate is expected after Year 1? Round your answer to two decimal places.

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Reference no: EM131991130

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