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1. The City of Westminster is planning on purchasing a new building for their Economic Development Division. The new building will cost $200,000. The city plans to borrow the entire cost of the building using a mortgage with a 4% interest rate. Should the City of Westminster use a 15-year mortgage or a 30-year mortgage? Answer the following questions:
a. What is the annual payment for the 15-year mortgage? What is the annual payment for
the 30-year mortgage?
b. For the 15-year mortgage – In the first year, how much payment is interest and how much of the payment goes to pay back the principal?
c. For the 30-year mortgage – In the first year, how much payment is interest and how much of the payment goes to pay back the principal?
d. What is the benefit of a 15-year mortgage relative to a 30-year mortgage? What is the benefit of a 30-year mortgage relative to a 15-year mortgage?
2. The City of Baltimore is issuing a 30-year bond with a face value of $20,000,000 and a stated annual interest rate of 5 percent. The city will make interest payments once a year.
a. Calculate the annual interest payment.
b. Calculate how much the city will receive from the bond offering under the following conditions:
i. Market interest rate remains unchanged at the time of the offering.
ii. Market interest rates increase to 6 percent at the time of the offering.
3. Assume that an 8 percent $200 million bond with annual interest payments and a remaining life of 15 years could be purchased today, when market interest rates are 2 percent. How much would you have to pay to buy the bond?
