How much will ian be willing to pay for the mortgage

Assignment Help Financial Management

Reference no: EM131509847

Joi Chatman recently received her finance degree and has decided to enter the mortgage broker business. Rather than working for someone else, she will open her own shop. Her cousin Mike has approached her about a mortgage for a house he is building. The house will be completed in three months, and he will need the mortgage at that time. Mike wants a 25-year, fixed-rate mortgage in the amount of $400,000 with monthly payments.

Joi has agreed to lend Mike the money in these months at the current market rate of 6 percent. Because Joi is just starting out, she does not have $400,000 available for the loan; she approaches Ian Turnbell, the president of IT nsurance Corporation, about purchasing the mortgage from her in three months. Ian has agreed to purchase the mortgage in three months, but he is unwilling to set a price on the mortgage. instead, he has agreed in writing to purchase the mortgage at the market rate in three months. There are Treasury bond futures contracts available for delivery in three months. A Treasury bond contract is for $100,000 in the face value of Treasury bonds.

1. What is the monthly mortgage payment on Mike's mortgage?

2. What is the most significant risk Joi faces in this deal?

3. How can Joi hedge this risk?

4. Suppose that in the next three months the market rate of interest rises to 7 percent.

a. How much will Ian be willing to pay for the mortgage?

b. What will happen to the value of Treasury bond futures contracts? Will a long or short position increase in value?

5. Suppose that in the next three months the market rate of interest falls to 5 percent.

a. How much will Ian be willing to pay for the mortgage?

b. What will happen to the value of T-bond futures contracts? Will a long or short position increase in value?

6. Are there any possible risks that Joi faces in using Treasury bond futures contracts to hedge her interest rate risk?

Reference no: EM131509847

Questions Cloud

Describe the controversies surrounding the project : School to Prison Pipeline Project- Describe the controversies surrounding the project. Take a position for or against the project and defend your position.

Precautions of releasing genetically modified organisms : Should Snomax and Ice-minus be considered modified organisms and subject to precautions of releasing genetically modified organisms? Explain why or why not.

Consider the flipper of a manatee and the fin of tiktaalik : Consider the flipper of a manatee and the fin of tiktaalik. Are these structure homologous, analogous, or both? Explain.

Describe four age-appropriate learning activities : Identify and describe four age-appropriate learning activities and toys that reinforce the important of health, nutrition, and safety.

How much will ian be willing to pay for the mortgage : What is the monthly mortgage payment on Mike's mortgage? How much will Ian be willing to pay for the mortgage?

Research and analyze two companies of the same industry : Research and analyze two companies of the same industry, each in a different and unique developing country or region

Production of testosterone in the testes : Describe the feedback loop between the anterior pituitary and the production of testosterone in the testes.

Average real risk-free rate over this time period : What was the average real risk-free rate over this time period?

List some of the characteristics of a good artistic analysis : Unit 1: Investigating the Human Experience Through Art - Discussion (150 t0 200 words). List some of the characteristics of a good artistic analysis.

User Account

All Pages