A mortgage instrument pays $1.5 million at the end of each of the next two years. An investor has an alternative investment with the same amount of risk that will pay interest at 8% compounded semiannually. Which of the following amounts is closest to what the investor should pay for the mortgage instrument?

Question

Quizplus · Accepted Answer

The present value of the mortgage payments can be calculated using the formula for the present value of an annuity. The effective annual interest rate for 8% compounded semiannually is approximately 8.16%. Calculating the present value of $1.5 million received at the end of each year for two years gives an amount closest to $2,669,041.

A Mortgage Instrument Pays $1