Question

Mrs. Keiko is looking at a three-year loan of JPY 5000000. Her bank quotes the interest rate as 4 percent plus one point. According to the bank's explanations, a point on his loan is 1 percent (one percent point) of the loan amount. The interest rate quotation also requires Mrs. Keiko to pay a point to the lender upfront and repay the loan later with 4 percent pẻ annum compounding interest. Calculate the annualized interest rate would Mrs. Keiko actually be paying!

Answer 1

Mrs. Keiko is looking at a three-year loan of JPY 5000000. Her bank quotes the interest rate as 4 percent plus one point. According to the bank's explanations, a point on his loan is 1 percent (one percent point) of the loan amount. The interest rate quotation also requires Mrs. Keiko to pay a point to the lender upfront and repay the loan later with 4 percent pẻ annum compounding interest. Calculate the annualized interest rate would Mrs. Keiko actually be paying!

Based on this, one point is not clear that whether upfront 1 point (1%) is on one year basis or for 3 year basis;

Assumption 1: If the upfront 1 point (1%) is on one year basis then the workings as below:

Loan Amount	50,00,000
APR	4.00%
Tenure	3 years
Interest Cost (a)	6,24,320	(5000000*(1+4%)^3)-5000000
Unfront Amount (b)	50,000	5000000*1%
Total Finance Cost (a) + (b)	6,74,320
Effective Rate	13.49%	Total Finance Cost/Loan Amount
Effective Annual Rate	4.50%	Effective Rate/Tenure

Assumption 2: If the upfront 1 point (1%) is for 3 year basis, then the workings as below:

Loan Amount	50,00,000
APR	4.00%
Tenure	3 years
Interest Cost (a)	6,24,320	(5000000*(1+4%)^3)-5000000
Unfront Amount (b)	1,50,000	5000000*1%*3
Total Finance Cost (a) + (b)	7,74,320
Effective Rate	15.49%	Total Finance Cost/Loan Amount
Effective Annual Rate	5.16%	Effective Rate/Tenure