A lender makes a $400,000 loan at a 6% interest rate for 25 years with monthly payments.

a) How much must she discount the loan such that the effective interest rate would be 7%, assuming the mortgage will be sold at par one year after closing (hint: par value = loan balance)?

b) Given your answer in (a), suppose the lender discounts the loan and the borrower pays it off at the end of the 3rd

year. What would be the effective borrowing cost (EBC)?

c) What is the annual percentage rate (APR) which the lender must disclose to the borrower?

d) If the borrower pays the loan off at the end of the 3rd year, what is the after-tax borrowing cost assuming the

borrower is in the 35% marginal tax bracket?