You are looking at a one-year loan of $16,500. The interest rate is quoted as 8.
ID: 2809562 • Letter: Y
Question
You are looking at a one-year loan of $16,500. The interest rate is quoted as 8.7 percent plus two points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay two points to the lender up front and repay the loan later with 8.7 percent interest.
What rate would you actually be paying here? show how to calculate using financial calculator
You are looking at a one-year loan of $16,500. The interest rate is quoted as 8.7 percent plus two points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay two points to the lender up front and repay the loan later with 8.7 percent interest.
Explanation / Answer
The effecitve borrowed amount will be after payment of 2 points=16500*(1-2%)=16170
Amount to be paid after 2 years=16500*1.087=$17,935.50
Using financial calculator:
PV=-16170
FV=16500*1.087=17935.50
PMT=0
N=1
CPT I/Y=10.918%