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A borrower is faced with choosing between two loans. Loan A is available for $75,000 at 6 percent interest for 30 years, with 6 points to be included in closing costs. Loan B would be made for the same amount, but for 7 percent interest for 30 years, with 2 points to be included in the closing costs. Both loans will be fully amortizing. Required: If the loan is repaid after 20 years, what is the effective interest rate for Loan A and Loan B? If the loan is expected to be repaid after five years, what is the effective interest rate for Loan A and Loan B?

A borrower is faced with choosing between two loans. Loan A is available for $75,000 at 6 percent interest for 30 years, with 6 points to be included in closing costs. Loan B would be made for the same amount, but for 7 percent interest for 30 years, with 2 points to be included in the closing costs. Both loans will be fully amortizing. Required: If the loan is repaid after 20 years, what is the effective interest rate for Loan A and Loan B? If the loan is expected to be repaid after five years, what is the effective interest rate for Loan A and Loan B?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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A borrower is faced with choosing between two loans. Loan A is available for $75,000 at 6 percent interest for 30 years, with 6 points to be included in closing costs. Loan B would be made for the same amount, but for 7 percent interest for 30 years, with 2 points to be included in the closing costs. Both loans will be fully amortizing. Required: If the loan is repaid after 20 years, what is the effective interest rate for Loan A and Loan B? If the loan is expected to be repaid after five years, what is the effective interest rate for Loan A and Loan B?
Transcribed Image Text:A borrower is faced with choosing between two loans. Loan A is available for $75,000 at 6 percent interest for 30 years, with 6 points to be included in closing costs. Loan B would be made for the same amount, but for 7 percent interest for 30 years, with 2 points to be included in the closing costs. Both loans will be fully amortizing. Required: If the loan is repaid after 20 years, what is the effective interest rate for Loan A and Loan B? If the loan is expected to be repaid after five years, what is the effective interest rate for Loan A and Loan B?
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