Mr. Smith is looking to get a thirty year home loan of $400,000. The bank has a loan for an APR of 5.50%, compounded monthly, plus 2.5 points. Note that a “point” is 1% of the amount of the loan and is deducted from the loan proceeds. For example, for a loan of $100,000, the bank would only give you $99,000 if the bank were to charge one point. However, the monthly payments that are to be made would be based on the $100,000 loan. Answer the parts below.

Part #1: What is Mr. Smith’s monthly payment on this loan?

Part #2: How much would Mr. Smith actually receive from the bank on this loan?

Part #3: What is the EAR on this loan? Note that the EAR is the annual rate that equates the monthly payments to the amount that is actually received from the bank.