A person borrows money at i^(12) = .12 from Bank A, requiring level payments starting one...

A person borrows money at i^(12) = .12 from Bank A, requiring level payments starting one month later and continuing for a total of 15 years (180 payments). She is allowed to repay the entire balance outstanding at any time provided she also pays a penalty of k% of the outstanding balance at the time of repayment. At the end of 5 years (just after the 60th payment) the borrower decides to repay the remaining balance, and finances the repayment plus the penalty with a loan at i^(12) = .09 from Bank B. The loan from Bank B requires 10 years of level monthly payments beginning one month later. Find the largest value of k that makes her decision to refinance correct.

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Colby Messinger answered 2 years ago

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