c. The borrower\'s payment book will look something like the following. Complete

Question

c. The borrower's payment book will look something like the following. Complete the entries for the first 6 month.

In many financial transactions, interest is computed and charged more than once a year. Interest on corporate bonds, for example, is usually payable every six months.   Consider a loan transaction in which interest is charged at the rate of 1 percent per month. Sometimes such a transaction is described as having an interest rate of 12 percent per annum. More precisely, this rate should be described as a nominal 12 percent per annum coumpounded monthly. Clearly, it is desirable to recognize the difference between 1 percent per month compounded monthly and 12 percent per annum compounded annually. If $1,000 is borrowed with interest at 1 percent per month compounded monthly, the amount due in one year is: F = $1,000(1.01)12 = $1,000(1.1268) = $1,126.80 This compares to F = $1,000(1+.12) =$1,120.00 for annual compounding. Hence, the monthly compounding has the same effect on the year-end amount due as the charging of a rate of 12.68 percent compounded annually. 12.68 percent is referred to as the effective interest rate.   To generalize, if interest is compounded m times a year at an interest rate of r/m per compounding period. Then, The nominal interest rate per annum, or the APR = m(r/m) = r. The effective interest rate per annum,or the EAR = (1+r/m)m - 1.

Explanation / Answer

b. EAR=((1+9%/12)^12)-1=9.38%

c.

a. The monthly interest rate on the mortgage is 9%/12 months = .75%. The APR on hte mortage=.75%*12=9%

b. EAR=((1+9%/12)^12)-1=9.38%

c.

Date Monthly payment Interest due Principal payment Outstanding Balance End of Month 31-Jan $805.00 $750.00 $55.00 $99,945.00 28-Feb $805.00 $750.00 $55.00 $99,890.00 31-Mar $805.00 $749.00 $56.00 $99,834.00 30-Apr $805.00 $749.00 $56.00 $99,778.00 31-May $805.00 $748.00 $57.00 $99,721.00 30-Jun $805.00 $748.00 $57.00 $99,664.00

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