CHAPTER 25
WILLIAMSON MORTGAGE, INC.
1. Jerry’s mortgage payments form a 25-year annuity with monthly payments, discounted at the long-
term interest rate of 5.5 percent. We can solve for the payment amount so that the present value of the
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
4. a. If the market interest rate is 6.2 percent on the date that Jennifer meets with the Max, the fair
value of the mortgage is the present value of an annuity that makes monthly payments of
5. a. If the market interest rate is 4.6 percent on the date that Jennifer meets with Max, the fair value of
the mortgage is the present value of an annuity that makes monthly payments of $3,070.44 for
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