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CHAPTER 23
CHATMAN MORTGAGE, INC.
1. Mike’s mortgage payments form a 25-year annuity with monthly payments, discounted at the long-
2. The most significant risk that she faces is interest rate risk. If the current market rate of interest rises
3. Treasury bond prices have an inverse relationship with interest rates. As interest rates rise, Treasury
bonds become less valuable; as interest rates fall, Treasury bonds become more valuable. Since Joi
will be hurt when interest rates rise, she is also hurt when Treasury bonds decrease in value. In order
4. a. If the market interest rate is 7 percent on the date that Joi meets with Ian, the fair value of the
mortgage is the present value of an annuity that makes monthly payments of $2,577.21 for 25
years, discounted at 7 percent, or:
b. An increase in the interest rate will cause the value of the T-bond futures contracts to decrease.
5. a. If the market interest rate is 5 percent on the date that Joi meets with Ian, the fair value of the
CHAPTER 25 C-3
6. The biggest risk is that the hedge is not a perfect hedge. If interest rates change, the fact that
Treasury bond interest is semiannual, while the mortgage payments are monthly, may affect the
relative value of the two. Additionally, while a change in one of the interest rates will likely coincide
