Today, the prime rate is 6%. A borrower has obtained a 4-year loan at a premium of 3%. This is a fixed rate loan for the first 3 years and thereafter, to be converted into a floating rate loan at the same premium for the last year. Immediately after the loan is taken, the prime rate reduces to 5% and remains at this rate for the next 4 years. Which of the following is TRUE?

Question 9 options:

1)	The loan interest will remain at 6% for the first 3 years and thereafter, reduce to 5% in the last year.

2)	The loan interest will only change after the third year.

3)	The loan interest will reduce to 8% immediately and remain at this level for the entire 7 years.

4)	The premium is determined by the demand and supply of money.