Assume you wish to borrow $3,000,000 for a new office building and you are evaluating several mortgage choices. The first option is a 5.00% fully amortizing, monthly payment, fixed rate loan for 10 years with $30,000 in origination fees and no points. The second option is a rate of 4.75% with the payment of .49 discount points with all other terms (including the baseline closing costs to which the points are added) identical to the first loan. Finally, the third option is a rate of 3.75% partial amortization loan with the payment of 3 discount points, a 2% prepayment penalty (computed as a percentage of the initial loan balance), and all other terms identical to the first loan. For the third loan, the payment is computed as if the loan is amortized over a 30 year period, but the loan is actually due in full at the end of 10 years. Since the terms of the loan dictate that it is due in 10 years, paying off the loan at the end of 10 years does not constitute a prepayment.

A. Compute the annual percentage rate for each loan if it is held for the entire 10 years. Assume there are no extra payments made

B. Compute the effective rate (not the EAR, just what you will actually pay over the time you hold the loan), assuming that you will pay the loan off after 6 years and that you never pay more than the required payment prior to that time.

C. Which loan is better if you hold the loan to maturity and why?

D. Which loan is better if you pay off the loan in 6 years and why?