You are contemplating financing (interest only) on a $10,000,000 shopping center. A lender has offered a...

You are contemplating financing (interest only) on a $10,000,000 shopping center. A lender has offered a 70% LTV loan with an interest rate of 7%. Another lender is offering a mortgage loan for 80% LTV, but wants an 8% interest rate. What is the effective interest rate on the additional debt contemplated in the second loan? Ch12

a. 1.0%

b. 15.0%

c. 23.6%

d. 19.0%

Expert Solution

Interest on 80% LTV loan = $8,000,000 × 8% = $640,000

Interest on 70% LTV loan = $7,000,000 × 7%= $490,000

Extra interest on additional $1,000,000 loan = $640,000-$490,000 = $150,000.

Effective interest on additional debt

= Additional interest/ additional debt

= 150,000/ $1,000,000 = 15%.

Answer is 15%.

jeff jeffy answered 2 years ago

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