What is the monthly mortgage payment on Mike’s mortgage (Hint: Use time value of money you have learned to solve this problem?

 The value of PV is taken right from the question as 500,000.

n=25 and it is multiplied by the given or number of months

That is why, = 12 months*25= Payments up to 300.

Hence, the ROI or rate of interest, (I) =8 percent.

Recognizing the answer that is achieved, the mortgage of Mike will be will have monthly payments which amount up to $3,859.80

What is the most significant risk Joi faces in this deal? 


In the establishment of the price of mortgage, considering the interest rate with respect to prevailing market in every three months is very important. This seemingly leads to the risk of interest rates to be the most important threat is faced by the Chatman in the transaction. It can be said that this is because of the principle that with an increment in the interest rate in this specific period, the value of mortgage will decrease and the mortgage amount will increase at this specific period.

How can Joi hedge this risk? Should Joe use a long hedge or short hedge? 


The deal actually comprises of the contract about the futures of Treasury bond. This contract should be focused upon by her for determining the method of hedge to use. That is why, there is an inverse relationship regarding the value of treasury bonds and the interest rate which makes it perfect to be implemented as a hedging tool for mitigating the risk. According to the analysis, the method of short hedge must be used by Chatman to the given risk while acquiring different contracts of three-months for the bond of treasury which have the value of almost 100,000 dollars. The essence is about making sure that the total deal amount is accounted for.

Suppose that in the next three months the market rate of interest rises to 9 percent. 


a. How much will Ian be willing to pay for the mortgage?



 It can be seen from above that the interest rate in the market is actually increasing to nine percent and we are simply needed to determine the present value of annuity. However, the payments on a monthly basis amount to approximately 3,859.08 dollars. N is equal to three-hundred payments in twenty-five years.

That is why, the financial calculator seems to show that when the internet is increasing to almost nine percent for this mortgage case, the amount that must be paid by Ian is 459, 854.23 dollars.

b. What will happen to the value of Treasury bond futures contracts? Will the futures position Joe takes increase or decrease in value?

Because of an increment in the interest rate in this specific case, the value of Treasury bond contract will fall or decrease. In such a situation, the short position will gain an advantage while the extended area will suffer. That is why, the occurrence that a short area has been secured by Chatman in the future seems to indicate that the gains in the future will do away with the mortgage value loss.

  Suppose that in the next three months the market rate of interest falls to 7 percent. 


a. How much will Ian be willing to pay for the mortgage? 



Considering the fact that monthly payments are equal to $3,859.08;

N is equal to 300 payments for at least 25 years.

The results of financial calculator indicate that when the interest rates rises up to nine percent, 546,009.480 dollars will have to be paid by Ian for the mortgage.

b. What will happen to the value of T-bond futures contracts? Will the futures position Joe takes increase or decrease in value? 


Since the interest rate has decreased in this specific case, the value of Treasury bond control will increase and there will be a substantial gain in the position which is extended and there will be an inverse gain the short position. That is why, since a short position has been taken by Chatman in the future seems to imply that the loss in futures will be offsetting the gained values regarding the mortgage.

What is the major risk Joi faces in using Treasure bond futures contracts to hedge her interest rate risk? 


Chatman experiences a significant risk regarding the fact that when she will use the contract futures of her Treasury bond, she would not bein any position to deal with the loss how she wants.

References of monthly mortgage payment on Mike’s mortgage

Clayton, M., & Natali, M. (2017). How to Pay off Your Mortgage in 5 Years. South Carolina: CreateSpace Independent Publishing Platform.

Sterphen, S. S., Clifford, W. M., & Martin, P. (1983). Mortgage Payments, Barron's Financial Tables. New York: Barron's Educational Series.