You have just purchased a new warehouse. To finance the purchase, you've arranged for a 25-year...

You have just purchased a new warehouse. To finance the purchase, you've arranged for a 25-year mortgage for the $1,440,000 purchase price. The monthly payment on this loan will be $10,600. What is the EAR?

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Expert Solution

Answer : To calculate EAR , we first need to calculate Monthly Rate of Interest :

Using Rate function of Excel :

=RATE(nper,pmt,pv,fv)

where

nper is the number of payments i.e 25 * 12 = 300 (Multiplied by 12 as Monthly payment)

pmt is the periodic payment i.e 10600

pv is the amount borrowed i.e 1,440,000

fv is the future value i.e 0

=RATE(300,10600,-1440000,0)

Monthly Rate is 0.6213% or 0.006213

EAR = [( 1 + Monthly rate)^12 - 1]

= [(1.006213)^12 - 1]

= 1.077158 -1

= 0.077158 or 7.72%

jeff jeffy answered 2 years ago

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