You are looking at a one-year loan of $12,000. The interest rate is quoted as 8.

Question

You are looking at a one-year loan of $12,000. The interest rate is quoted as 8.4 percent plus two points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are very common with home mortgages. The interest rate quotation in this example requires the borrower to pay two points to the lender up front and repay the loan later with 8.4 percent interest. What rate would you actually be paying here? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Interest rate 10.61 % What is the EAR for a one-year loan with a quoted interest rate of 11.4 percent plus two points? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Is your answer affected by the loan amount? Yes 0 No

Explanation / Answer

Loan amount received= 12000*(1-0.02) = $11760

Loan amount repaid after 1 year = 12000*(1+0.084)= $13008

FV= PV*(1+r)^n

13008= 11760*(1+r)^1

1+r = 1.106122

R= 10.61%

2: Loan amount received= 12000*(1-0.02) = $11760

Loan amount repaid after 1 year = 12000*(1+0.114)= $13368

FV= PV*(1+r)^n

13368= 11760*(1+r)^1

1+r = 1.136735

R= 13.67%

3: Yes.

(Both amount repaid and loan received are affected by the loan amount)

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