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Answer ALL questions. You have 90 minutes to finish it. Show ALL your workings clearly. Question 1 ( 16 marks) Sam plans to apply for a fully amortized mortgage loan ( 10 million) of 20 years that charges 5% fixed mortgage rate. a) What is the monthly mortgage payment? ( 4 marks) b) What is the percentage of the first payment that is used to pay principal? Do you think it is "fair" to Sam to have this low percentage of the first payment for paying principal? (4 marks) c) Suppose Sam fully pays off the mortgage loan right after he has made repayments for 8 years. Compute the loan balance using both PV and FV methods. ( 8 marks) Question 2 (14 marks) a) Suppose you want to borrow $20 million from Bank A for a commercial property and you can make two balloon payments of $2 million each in the 60 th and 120 th months. The fixed interest rate is 5% for this 15 years mortgage. What is the monthly payment? (7 marks) b) Suppose you want to borrow $2 million from Bank B for a residential property and you can afford a monthly payment of $7,000 only. The fixed interest rate is 7% for this 5 years mortgage. What is the balloon payment? (7 marks) Question 3 (20 marks) a) Suppose you have $10 million to lend to house buyers for five years. Explain the factors affecting whether you should invest in one-year mortgage or five-year mortgage. (10 marks) b) John is a portfolio manager and has $5 billion to invest in the real estate market which he thinks may be currently undervalued. He is choosing between direct and indirect real estate investments. Explain 3 factors that he should evaluate for this investment decision. (10 marks) Question 4 (10 marks) Do you think it is more or less likely to have the subprime mortgage crisis without CDO? Why? Formulas FV=PV(1+r)tPV=FV/(1+r)tPVA=C(11/(1+r)t)/rFVA=C((1+r)t1)/r

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