please include how to calculate You are looking at a one-year loan of $16,500. T
ID: 2809872 • Letter: P
Question
please include how to calculate
You are looking at a one-year loan of $16,500. The interest rate is quoted as 7.7 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 7.7 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 What is the EAR for a one-year loan with a quoted interest rate of 10.7 percent plus two points? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e-9.32.16.) EAR Is your answer affected by the loan amount? NoExplanation / Answer
PV = $16500
Time= 1 Year
Rate = 7.7% plus 2 points
Interest to be paid immediately = 0.02*$ 16500 = $330
Amount to be paid after 1 year = (1 + .077) x $16500 = $17770.5
PV = $16500 - $330 = 16170
FV = 17770.5
N = 1
FV = PV(1 + r)^n
17770.5 = 16170(1 + r)^1
1 + r= 17770.5/16170
R= 9.9%
2:
PV = $16500
Time= 1 Year
Rate = 10.7% plus 2 points
Interest to be paid immediately = 0.02*$ 16500 = $330
Amount to be paid after 1 year = (1 + 0.107) x $16500 =18265.5
PV = $16500 - $330 = 16170
FV =18265.5
N = 1
FV = PV(1 + r)^n
18265.5 = 16170(1 + r)^1
1 + r= 18265.5/16170
R= 12.96%
Yes.
Answer is affected by the loan amount since the interest is calculated on the loan amount.
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