Question

The holding period when needed is 12 years, Loan is $150,000 with terms 6%, 30 payable monthly

1. Calculate the effective-interest cost or yield after 12 years have lapsed:

2. Now, assume a prepayment penalty of $600 when calculating the effective-interest cost to the borrower after 12 years have lapsed. Effective-Interest Cost or Internal Rate of Return for the lender:

Answer 1

1

Effective interest rate = (1+r/n)^n - 1

where n = no of payments in a year

r= annual interest rate

Effective interest rate = [1+(6/12)]^12 - 1

6.17%

2. If we add prepayment charges to the laon we would be paying 150600 at the end after 12 years

to calculate an effective interest rate taking this outflow we have to first calculate the new annual interest rate by taking the future value as 150600, pv = 150000 , pmt = 9000, n =12

6.024%

=

[1+(0.06024/12)]^12 - 1

6.19%

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Thankyou