Problem 6-62 Calculating EAR with Points [LO4] You are looking at a one-year loa

Question

Problem 6-62 Calculating EAR with Points [LO4] You are looking at a one-year loan of $16,000. The interest rate is quoted as 8.8 percent plus thre amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay three points to the lender up front and repay the loan later with 8.8 percent interest. e points. A point on a loan is 1 percent (one percentage point) of the loan 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

Explanation / Answer

The total interest payable on one year loan = [Loan amount * Up front Interest rate]+[Loan amount * Later Interest rate] The total interest payable on one year loan = [$16000 * 3%]+[$16000 * 8.8%] = $1,888 Interest rate you would actually paying = Total Interest payable / Loan amount = $1888/$16000 = 11.80%

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