Your boss needs to attract new borrowers. However, she is torn between offering too low of an interest rate (risking too low of margins) and too high of an interest rate (risking not enough business). The market interest rate is 4.75%, so she decides to offer 4.25%, with the assumption that she will obtain an interest rate of 4.75% with prepayment fees. If she projects that the average prepayment will occur at the end of five years and the term of the mortgage will be 25 years, then what prepayment penalty must she charge for the bank to act as if they loaned at an interest rate of 4.75% and not 4.25%? Payments made monthly.

• A. 3.95%
• B. 1.45%
• C. 2.66%
• D. 3.16%
• E. 1.15%