The interest rate on a one-year loan is quotedas 12 percent plus 3 points (see the previous

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The interest rate on a one-year loan is quotedas 12 percent plus 3 points (see the previous problem). What is the EAR? Is youranswer affected by the loan amount?

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You are looking at a one-year loan of $10,000. The interest rate is quoted as 8 percent plus three points. A point on a loan is simply 1 percent (one percentage point) of the loan 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 percent interest. What rate would you actually be paying here?

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Related Book For  book-img-for-question

Fundamentals of Corporate Finance

ISBN: 978-0077861704

11th edition

Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan

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