You are looking at a one-year loan of $20,000. The interest rate is quoted as 7%...
You are looking at a one-year loan of $20,000. The interest rate is quoted as 7% plus four points. A point on a loan is 1% 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 four points to the lender up front and repay the loan later with 7% interest.
A. What rate would you actually be paying here?
B. What is the EAR for a one-year loan with a quoted interest rate of 10% plus two points?
Homework Answers
1) Gross loan 20000
No. of points 4
Amount paid upfront 800
Net loan 19200
Payback @ 7% 21400
EAR 11.46% (21400-19200)/19200
2) Let loan be 100
No. of points 2
Amount paid upfront 2
Net loan 98
Payback @ 10% 110
EAR 12.24% (110-98)/98
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