Question 1(8 marks) Tom purchases a property and finances it with a Graduated Payment Mortgage (GPM) loan for 500,000 at j2=5%. His monthly payment (PMT) for the first year will be 2000; for the 2nd year, PMT increases by 5%; 3rd year, PMT has another increase of 4% (compared with 2nd year). Assume a term of 3 years.

a. (2 marks) What is the PMT paid for each month of the 2nd year? 3rd year?

b. (3 marks) What is the OSB on the loan at the end of 3rd year?

c. (2 marks) Does negative amortization happen for some time period of the first three years for the above mortgage? Yes or No. Explain

d. (1 mark) Assume after the first term, Tom wants to switch to the standard fixed rate mortgage.

After discussing with the lender, they reach an agreement:

20 year amortization for the standard mortgage (this is after the first 3 years under GPM), still j2=5% and monthly pay, then what would be the dollar amount of PMT for the standard mortgage? Get Finance homework help today

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