FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities
A borrower takes a 30-year fixed-rate fully amortizing mortgage of $300,000 at 6% annual interest, compounded monthly. The monthly payment is $1,798.65. What is the principal repaid in the first monthly payment?
The first payment repays $298.65 of principal. Interest for month one is $300,000 times 0.5%, or $1,500, and the remainder of the $1,798.65 payment goes to reducing the balance.
- A$298.65Correct
- B$1,500.00
- C$1,798.65
- D$1,000.00
Explanation
Monthly rate is 0.06/12 = 0.5%. First month interest = 300,000 x 0.005 = $1,500. Principal repaid = 1,798.65 - 1,500 = $298.65. Using $1,500 as principal confuses interest with principal.
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