Level-payment fixed-rate Mortgage

[RomanS]

Hi,
here is a question from 2010 Schweser Practice Exams L2 E2 Q58 which I think could be wrong

Question
A level-payment, fixed rate mortgage has the following characteristics

Term = 30 years
Mortage Rate = 9%
Servicing Fee = 0.5%
Original mortgage loan balance = $150,000

The monthly mortgage payment is:

Answer Options
a) $416.67
b) $1,125.00
c) $1,206.93
d) $1,216.70

Correct Answer
c)

The results in c) doesn't recognize the servicing fee, i.e. in calculator terms

N=360 ; I/Y=9/12 > PV=-150,000 ; FV=0

But why would we do that?

Best Roman

 

[David Harper CFA FRM]

Hi Roman,

The assigned Fabozzi chapter explains/illustrates that the servicing fee(s) (base and excess) is a portion of the loan's note rate. So, it's embedded already in the 9.0% mortgage rate. A good question, i think!

David

 

[RomanS]

Hi David,
Ok, another way how to trick people
At least the monthly payment for the wrong mortgage rate (9.5%) doesn't show up in the asnwers...
Thanks.
Best Roman