In: Finance
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?
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%