Question

Suppose, you sold an apartment house by accepting $1,000,000 down and monthly payments of $15,000 per month for 10 years. You place the entire down payment and all payments as they are received into a money market account earning 5 percent compounded monthly. What is the amount you will have accumulated in the money market account when the mortgage is paid of

Answer 1

Answer:

The present value is $3,991,855.88

Explanation:

The interest given can be converted into effective annual rate using the below formula:

EAR = [(1 +stated rate/no. of compounding periods) ^no. of compounding periods - 1]* 100

EAR=(1+5%/12)^12-1*100

       =5.12%

FV of downpayment=PV*(1+r)^N

                                  =$1000000*(1+5.12%)^10

                                   =$ 1,647,606.60  

Future of an ordinary annuity=A((1+r)^N-1/r

                                                =$15000*((1+5.12%/120)^10*12-1))/5.12%/120

                                                =$2,344,249.28

Total present values=2344249.28+1,647,606.60  

                                  =$3,991,855.88