Suppose a bank decides to make a mortgage loan to an individual so that they may purchase a home. The homeowner will pay the bank $1,500 per month in mortgage payments for the next 30 years. The bank will collect the mortgage payments at the end of the month. If the borrower does not default on their loan, how much money will the bank have accumulated if they could reinvest the monthly income at an annualized rate of 5% for the entire investment horizon?

Question

Quizplus · Accepted Answer

The bank will have accumulated $1,248,387.95 by reinvesting the monthly mortgage payments at an annualized rate of 5% over 30 years. This can be calculated using the future value of an annuity formula, which accounts for regular payments (in this case, $1,500 per month) being invested at a certain interest rate (5% annually, or approximately 0.4167% monthly) over a set period (360 months).

Suppose a Bank Decides to Make a Mortgage Loan to an Individual