Rate quoted is 2 % which is compounded semi annually

quotedrate =0.02
m= 2 (compounded semiannually)
Hence we need to calculate EAR
Effective annual rate (EAR)= [(1+quotedrate/m)^m-1]
=[(1+0.02/2)^2-1]
=2.01%
Effective monthly rate=2.01/12=0.1675%
I/Y=0.1675%
Since at the end we will be done with our payment
FV=0
PV= max of (6times taxable income, 65% of purchase price)
=max of (6*100,000, 0.65*1200000)
=Max of(600000,780000)
=-780000
Since Mr. Smith wants to go for extended tenor of amortization we will take 25yrs
No.of yrs=25
Payment frequency=monthly=12 month/yr
N=25*12=300
Payment per month is calculated using financial calculator using the values above or by using
formula
Annuity Present value=C*[1-1/(1+r)^n]/r
Where C= PMT
r = I/Y=0.001675
n = N=300
Annuity present value=780000
780000 =C*[1-1/(1+0.001675)^300]/0.001675
C=-3309.863$
Monthly Mortgage payment= $3309.863

Q1b
A relationship between principal and agent is called agency relationship, often conflict of
interest is the major problem in agency relationship.
Agency relationship 1:
First agency relationship 1 is between with Mr. Smith (principle) and Ms. Angel (Agent).
Ms. Angel is a real estate broker who is trying to help Mr. Smith acquire a property of $1.2
Million.
Agency problem: Conflict occurs when both principal and agent have their own personal
interests. In this case, Mr. Smith looking for a town house in Vancouver for a best price and
Ms. Angel is trying to close the deal at $1.2 Million with a target date of June 2021. There
could be indirect costs like administrative cost which were not discussed by Ms. Angel, this
cost could be an additional burden to Mr. Smith. To address this issue Mr. Smith and Ms.
Angel should discuss all cost included for purchase in an agreement to get transparency.
Agency relationship 2:
Second relationship 2 is between with Mr. Smith and Bank B Mortgage broker Ms.
Catherine. Mr. Smith is planning to avail mortgage for his property and Ms. Catherine is
offering a loan amount of $ 780000 for 2% mortgage rate compounded semiannually which is
supposed to be paid monthly for 25yrs of amortization period.
Agency Problem: Here though Mr. Smith is paying 2% mortgage rate compounded annually
he is paying total loan amount of $ 992958.9 (3309.863*300) against borrowed amount of
$780000, which is $212958.9 (27.3%). Since Mr. Smith is happy with the lower mortgage
rate , he should increasing the monthly amount payments (repaying quickly).

Q2
N = Number of yrs, I/y= interest rate, PMT= payments made, FV= future value, PV= present
value
Step1: Starting with Present value calculation from age 65-85 to get amount $20,000 for 20
yrs
N= 20yrs
I/Y=5.5%
PMT=$20,000
FV=0
PV=?
Using financial calculator or formula for PV
PV=cashflow*[(1-(1+r)^-n)/r]
Where cashflow= PMT= 20000
r = I/Y= 0.055
 n=N=20
Substituting these values in the equation of PV we get
PV=20000*[(1-(1+0.055)^-20/0.055]
=-239007.65$
Step2: Calculating PV at the age of 45
45-65 there was no payment made towards investment hence
N= 20yrs
I/Y=5.5%
FV=-239007.65 $ (PV at the age of 65 becomes FV at the age of 45)
PMT= 0 (since no payments were made between 45-65)
Applying the formula in step1 for PV we get value of PV or using financial calculator
PV= 239007.65[(1-(1+0.055)^-20/0.055]
=81914.844$
Step 3: Calculating PMT at the age o26-45
N= 19yrs
I/Y= 5.5%
FV= 81914.844$ (PV at the age of 45 becomes FV at the age of 26)
PV= 0
PMT=?
Calculating PMT either by using financial calculator or FV formula
FV= cashflow*[((1+r)^n-1)/r]
Substituting values in the above equation we get
81914.844=cashflow*[((1+0.0055)^19)-1/0.0055]
Cashflow or PMT= -2551.65$
Hence, Mr. Paul will have to pay $2551.65 till the age of 45 to obtain a payment of $20,000
for 20 yrs