5. You have just purchased a new warehouse. To finance the purchase, you\'ve arr

Question

5. You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30-year mortgage loan for 80 percent of the $2,600,000 purchase price. The monthly payment on this loan will be $11,000. What is the effective annual rate (EAR) on this loan?

6. On June 1, you borrowed $212,000 to buy a house. The mortgage rate is 8.25 percent per year. The loan is to be repaid in equal monthly payments over 15 years. The first payment is due on July 1. How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year.)

7. You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 7.75 percent, compounded daily. Loan B offers a rate of 8 percent, compounded semi-annually. Which loan should you select and why?

Explanation / Answer

5. N = 360, FV = 0, PV = 0.80*2,600,000, PMT = -11,000

use rate function in Excel

monthly rate = 0.2523

EAR = (1 + 0.2523%)^12 - 1 = 3.07%

6. PV = 212,000, FV = 0, N = 180, rate = 8.25%/12

use PMT funciton in Excel

monthly payment = 2,056.6976

interest on the second payment = (212,000 - 2,056.6976)*8.25%/12 = 1,443.36

principal repaid on the second payment = 2,056.6976 - 1,443.36 = 613.34

7.

EAR of A = (1 + 7.75/365)^365 - 1 = 8.06%

EAR of B = 1.04^2 - 1 = 8.16%

so A is better since EAR is lesser

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