Question

A 20-year loan of 150,000 is negotiated with the borrower agreeing to repay principal and interest at 5%. A level payment of 9,000 will apply during the first ten years and a higher level payment will apply during the remaining ten years. Each time the lender receives a payment from the borrower, he will deposit the portion representing the principal into a sinking fund with an annual effective interest rate of 4%. (Assume that the interest portion remains level throughout these 20 years and assume that all but the interest portion is deposited into the sinking fund.) This scheme will replace the lender’s capital.

Find the lender’s yield on this investment.

	A.	.0384
	B.	.0784
	C.	. 0479
	D.	The answer is not listed here
	E.	.0704

Answer 1

The lender initially gives out 150000

In return gets 9000 for 10 years and level payments for the next ten years

He deposits the capital portion of each payment into a sinking fund yielding 4%.

Thus his cash inflows are the interest payments and the final value of the sinking fund at the end of 20 years.

Yield will be the rate that equates the initial outflow to the series of inflows.

Thus answer is (C) 0.0479 approxiamtely