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FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities

A borrower takes a $200,000 mortgage at 6% annual interest (0.5% per month), with interest-only payments for the first 5 years, after which the loan fully amortizes. What is the monthly payment during the interest-only period, and what is the principal balance at the end of year 5?

The monthly payment is $1,000 and the balance remains $200,000. During an interest-only period the borrower pays only interest, which is $200,000 times 0.5% per month, and no principal is repaid, so the outstanding balance is unchanged after five years.

  1. A$1,000 payment; balance $200,000Correct
  2. B$1,199 payment; balance $200,000
  3. C$1,000 payment; balance $170,000
  4. D$1,200 payment; balance $180,000

Explanation

Interest-only payment = 200,000 x 0.005 = $1,000 per month. No principal is repaid, so the balance stays $200,000. Option B uses a fully amortizing-type payment; options C and D assume principal reduction that does not occur.

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