FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities
A borrower has a $400,000 interest-only mortgage at 4.8% annual interest, paid monthly, with a balloon payment of the full principal due at the end of year 10. What is the monthly payment during the interest-only period?
The monthly payment is $1,600. With interest-only loans, each payment covers just interest, which is $400,000 times 4.8% divided by 12. The principal remains outstanding and is repaid in a balloon at the end of year 10.
- A$1,600Correct
- B$1,920
- C$3,333
- D$2,100
Explanation
Monthly interest = 400,000 x 0.048 / 12 = $1,600. The principal is not reduced, so the balance remains $400,000 until the balloon. $1,920 wrongly uses 5.76%, and $3,333 is principal spread over 120 months (400,000/120).
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