wahab wants to buy a property for OMR 105,000 and wants an 80% (LTV) loan. A lender indicates that a fully amortizing loan can be obtained for 30 years at 8% interest. However, a loan origination fee of OMR 3,500 will also be necessary for Wahab to obtain the loan. The lender also imposes a penalty of 2% of the outstanding loan balance if the loan is repaid early.

a. What is the effective rate on this loan today if Wahab intends to repay the loan after 5 years.

b. Compare the above calculated effective rate (in part (a)) with the loans nominal rate (APR). Explain this difference.

c. Assume that the interest rates increased to 12% five years after the loan was issued (ignoring part (a) above,), the lender offers a OMR 3,000 discount for an early repayment. If Wahab agrees to repay the loan as induced by the lender in 5 years, what will the effective rate on this prepayment be?

d. Given your answer in (c), will the repayment benefit Wahab? Why?