1)

Short sale is something when lender agrees to take a less amount as mortgage payoff as to facilitate the sale. In this case lender forgives the remaining balance of loan.

Cases under which short sale occurs

1. The owner is financially distressed.
2. value of house decline and mortgage loan value is more than that of home value.

Conditions for short sale

• mortgage lender permission is required before proceeding for such thing.

Example

If a lender lends 500000rs to X in mortgage of his house worth 500000rs. But market price of property falls down to 480000rs so in this case its a 20000rs loss in transaction if lender ready for short sale.

Benefits and limitation

Short sale does not provide much benefit to both the parties, the only benefit is that lender gets cheap rate property at a loss of 20000rs.

2)

Parameter	Current Mortgage	New Option
Risk that the monthly payment will change over the next 30 years	No such risk, the interest rate is fixed and hence the monthly payment is fixed	It bears the risk of change in monthly payment on every reset date and that will be once every year.
Interest rate risk	The interest rate is fixed over the term and hence there is an interest rate risk. The present value of your mortgage will keep changing based on the changes in the interest rate	There will be no interest rate risk here as it is an adjustable rate mortgage
Impact on financial institution	The interest income of the financial institution remains fixed. It's known and certain There is no variability in the income. This can lead to a better planning.	The interest income is a variable. And it will change on every reset date. So the institution is subjected to variability in its interest income.
Impact on customers	The interest expense of the customer remains fixed. It's known and certain There is no variability in the expense. This can lead to a better planning.	The interest expense is a variable. And it will change on every reset date. So the customer is subjected to variability in its interest expense.

3)

A. Wealth- wealth is one of the factor which will be impacting the demand and supply the bonds during this phase of rapid economic growth because when there would be a higher amount of wealth in the hands of the people, there will be a rather attracted to invest into equity because at the time of the robust economic growth, equities are offering the high rate of return but they are also trying to allocate their assets to the bonds and they will be trying to invest in bonds in order to diversify their overall portfolio and this diversification will be increasing because various companies will also be offering a higher rate of bond yield at the time of economic growth because they can facilitate a high interest because of higher earning so there will be a higher allocation towards bonds in compared to normal economic recession in early periods.

B. Default risk- at the time of high economic growth, there are very low default risk associated with interest payments because there is a high liquidity present in the system and businesses are making high profits so there is a very low risk related to the default risk at the time of robust economic growth

C. General business condition during economic growth scenarios are forecasted at having a favourable market conditions in order to maximize their profits so businesses will be exposed to lesser risks and their bonds will be more safe at the time of the economic growth as they are less bound to default and general economic conditions will be supportive as the economy will be on a growth trajectory.

4)

Answer : Below is the Table showing Calculation of Duration :

Year (Weights)	Cah Flows	PVF @2%	Discounted Cash Flows	Weights * Discounted Cash Flows
1	60	0.980392157	58.82352941	58.82352941
2	60	0.961168781	57.67012687	115.3402537
3	60	0.942322335	56.53934007	169.6180202
4	1060	0.923845426	979.2761516	3917.104606
		Total	1152.309148	4260.88641

Duration = Sum of ( Weights * Discounted Cash Flows) / Discounted Cash Flows

= 4260.88641 / 1152.309148

= 3.70 half years or 1.85 years (3.70 / 2)