A borrower has a mortgage balance of $300,000 at 4% annual interest, compounded semi-annually. What is the monthly interest payment?
Correct Answer
D) $991.77
Canadian mortgages compound semi-annually, so the equivalent monthly rate is (1 + 0.04/2)^(1/6) - 1 = (1.02)^(1/6) - 1 = 0.0033059, or 0.33059%. One month's interest on $300,000 is $300,000 x 0.0033059 = $991.77.
Why This Is the Correct Answer
This is correct because the monthly rate equivalent to 4% compounded semi-annually is (1.02)^(1/6) - 1 = 0.33059%, and 0.0033059 x $300,000 = $991.77.
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