Question
The CFO needs to attract new borrowers. She is torn between offering too low of an interest rate, and having her profit margins squeezed, and
The CFO needs to attract new borrowers. She is torn between offering too low of an interest rate, and having her profit margins squeezed, and too high of an interest rate, which would lead to low revenue. Her competitors offer interest rates at 2.95%, so she decides to offer 2.40%, with the assumption that she will obtain an interest rate of 2.95% with prepayment fees. If she projects that the average prepayment will occur at the end of six years, then what prepayment penalty must she charge for the bank to act as if they loaned at an interest rate of 2.95% and not 2.40%? Assume loan is amortized over 30 years.
A. 4.15%
B. 1.56%
C. 3.94%
D. 4.59%
E. 5.36%
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