You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30-year...

You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30-year mortgage loan for 80 percent of the $2,600,000 purchase price. The monthly payment on this loan will be $11,000.

a. What is the APR on this loan?

b. What is the EAR?

Solutions

Expert Solution

a.Information provided:

Purchase price = $2,600,000

Loan= present value= 0.80*$2,600,000 = $2,080,000

Time= 30 years*12= 360 months

Monthly payment= $11,000

The yield to maturity is calculated by entering the below in a financial calculator:

PV= -2,080,000

N= 360

PMT= 11,000

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 0.4058

Therefore, the yield to maturity is 0.4058%*12= 4.8690% 4.87%.

2.The effective annual yield is calculated using the below formula:

Effective annual yield= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

Effective annual yield = ( 1 + 0.0487/ 12)^12 – 1

= 1.0498 – 1

= 0.0498*100

= 4.98%

jeff jeffy answered 1 year ago

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