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Consumption and Mortgage Calculations Quiz

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Consumption and Mortgage Calculations Quiz

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Questions and Answers

Match the investors with their investment strategies:

Investor A = Invest in the real opportunity to maximize t=1 consumption Investor B = Consume the entire income at t=0 Both Investors = Have an income of $200,000 today

Match the terms with their definitions in the context of the consumption model:

NPV Rule = Advice to accept investments that increase wealth t=0 = Current period of consumption t=1 = Future period of consumption Investment Opportunity = Cost of $200,000 with a return of $215,000

Match the loan components with their characteristics:

Down Payment = 20% of the house's value Total House Value = $2 million Annual Interest Rate = 6% with monthly compounding Mortgage Duration = 25 years

Match the concepts with their effects on mortgage principal repayment:

<p>First Year Payment = Percentage of principal repayment is low Subsequent Years Payment = Percentage of principal repayment increases Fixed Monthly Payments = Remain constant throughout the loan duration Interest Payment = Higher in the initial years of the loan</p> Signup and view all the answers

Match the investment characteristics with the corresponding investor preference:

<p>Patient Investor = Prefers to wait for future consumption Impatient Investor = Wants immediate consumption Real Investment Opportunity = Returns $215,000 at t=1 Risk-free Loan Access = Available to both investors</p> Signup and view all the answers

Study Notes

Consumption Model

Two-period model: now (t=0) and next year (t=1)
Two investors:
- Investor A: patient, wants to consume max at t=1
- Investor B: impatient, wants to consume max now
Both have $200,000 income today, no income next year
Access to investment opportunity: $200,000 now, returns $215,000 at t=1
Risk-free borrowing/lending at 10% annual rate
Investment and consumption decisions, cash flows, and NPV rule explained for each investor

Mortgage Calculation

Sydney house purchased for $2 million
20% down payment, $400,000
25-year mortgage for remaining $1.6 million
Fixed monthly payments, first payment due next month
6% annual interest rate, monthly compounding
Calculate principal repayment in the first year as a percentage of total annual mortgage payment
Determine whether this percentage will increase, decrease, or remain constant in subsequent years and explain why.

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Description

Test your understanding of the two-period consumption model and mortgage calculations. This quiz covers the investment decisions of patient and impatient investors, as well as specific mortgage repayment structures. Dive into these critical financial concepts and apply what you've learned!