Bankers at New Savings are setting mortgage rates. They first determine the interest rate for 30-year FRM to be 4.5% without any discount point, which is at the average level in the region. They then consider two choices for the FRM with discount points as below:

Choice 1: 30-year FRM @ I = 3.50%, and 1 point.

Choice 2: 30-year FRM @ I = 3.50%, and 2 points.

• Calculate the effective yields of the three mortgages for year 1, 2, 5, 15, 30.
• Briefly graph the yield curves.
• Which of the two choices would you advise them to offer to the market and why?