Consider two loans with a 1-year maturity and identical face values: a(n) 8.3% loan with a 0.99% loan origination fee and a(n) 8.3% loan with a 4.9% (no-interest) compensating balance requirement. Which loan would have the higher effective annual rate (EAR)? Why?

Consider two loans with a 1-year maturity and identical face values: a(n) 8.3% loan with a 0.99% loan origination fee and a(n) 8.3% loan with a 4.9% (no-interest) compensating balance requirement. Which loan would have the higher effective annual rate (EAR)? Why?

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

Problem 1PS

See similar textbooks

Related questions

Q: The effective annual profit rate on a mortgage with monthly payments is 9.38%. What is the monthly…

A: Given the effective annual profit rate of 9.38%, we can calculate the monthly profit rate using the…

Q: which of the following conditions indicates that a loan assumption is least advisable? An existing…

A: Loan Assumption In a simple term loan assumption which indicates that financial obligation which was…

Q: please step by step solution.

A: PART A: PART B: PART C: PART D:

Q: Consider a 15 year, fixed rate mortgage for $150,000 at a nominal rate of 8%. The loan comes with a…

A: A fixed interest rate loan is where your Interest Rate is locked in (i.e. fixed) for a certain…

Q: A company has a loan of 80,000 to be paid in 20 level annual payments. The interest and the…

A: Loans are paid by annual payments that carry the interest and loan amount but annual payments are…

Q: You have taken out a $7,500,000 loan with a 4% interest rate, 30 year amortization and ten year…

A: The concept of calculating the remaining loan balance on an amortizing loan involves key components…

Q: Debt Service Coverage Ratio (DSCR or DCR): Assume that a property has a monthly net operating income…

A: Given: Net operating income = $25,000 Debt service coverage ratio = 1.35 Interest rate = 4.5% Years…

Q: You are looking at a one-year loan of $18,000. The interest rate is quoted as 7.4 percent plus two…

A: Here,Loan Amount $ 18,000.00Interest Rate7.40%Lender Upfront Cost2%Time Period in years1Lender…

Q: Use the formula A=P(1+rt) to calculate the maturity value of the simple interest loan when…

A: formula: A=P(1+rt) where, p=principal r=rate t=time in years

Q: To payoff a loan of $1000 you need to make 40 payment of $36.56 per month. What rate of interest are…

A: Annual percentage rate refers to the interest rate paid by the borrower to the lender on a yearly…

Q: You are considering the following fixed interest rate mortgage loan alternatives: Alternative 1:…

A: In order to calculate the incremental cost of borrowing, we will have to use the difference in the…

Q: All of these have a balloon payment due at the end of the loan term EXCEPT a.a fully amortized…

A: A balloon loan is a type of loan that which do not fully amortize during the tenure of the loan. As…

Q: What is the total cost of interest with the new interest rate?

A: Loan is financial agreement where a person (lender) lends lump-sum money to other person (borrower)…

Q: 1. You have just obtained a commercial mortgage for $6.25M with a 5-year term, 25-year amortization…

A: We are required to calculate an amortization table, therefore, we have to use excel and the excel…

Q: P. Ise to determine the regular payment amount, rounded to the nearest dollar. Consider the…

A: Here, Loan Amount is $180,000 Interest Rate of Mortgage A is 12.25% Interest Rate of Mortgage B is…

Q: Which of the following is false? I. A lower interest rate would increase the present value of an…

A: Solution: Present value means the value of cash flows in today’s terms.

Q: [+] to determine the regular payment amount, rounded to the nearest dollar. Conside lowing pair of…

A: A loan to a borrower given by the bank/ financial institution which helpful to the borrower in…

Q: 5. What is the yield to maturity on a simple loan for $1 million that requires a repayment of $2…

A: Amount of repayment (A) = $2,000,000 Principal amount taken (P) = $1,000,000 Term (n) = 5 years Let…

Q: Find the total installment cost and the finance charge for an installment loan with these…

A: A loan is a financial arrangement in which one or more people, companies, or other entities lend…

Q: What is the maturity value on a 6-year loan for S7, 585 if the annual simple interest rate is 6.1%?…

A: Principal = $7,585Interest rate = 6.1%Time= 6 yearsMaturity value=?

Q: You've borrowed $6,903.71 and agreed to pay back the loan with monthly payments of $270. Assume the…

A: Compound = Monthly = 12Present Value = pv = $6903.71Monthly Payment = p = $270Interest Rate = r = 15…

Q: monthly

A: I would borrow a loan that is amortized quarterly. The reason for this is based on the principles…

Q: Over the duration of the loan, the total loan payment is... ... gradually increasing for…

A: Loans are paid by equal fixed payments that carry the interest and loan payments.

Q: Which results in a lower total interest charge, borrowing $1,290 to be repaid 12 months later as…

A: Interest is an extra cost which is paid on the borrowed amount for the period. It increases the…

Q: What is the total amount you will pay if you do not pay the loan within the term and meet all the…

A: Step 1:Given: Loan amount = $5400Period of loan = 72 monthsFinal loan amount = $6965.35Interest is…

Concept explainers

Effective Interest Rate

The term interest rate can be defined as the amount that is charged by the lender as a percentage on the principal amount. Interest rate which is charged annually is known as annual percentage rate.

Question

Consider two loans with a 1-year maturity and identical face values: a(n) 8.3% loan with a 0.99% loan origination fee and a(n) 8.3% loan with a 4.9% (no-interest)
compensating balance requirement. Which loan would have the higher effective annual rate (EAR)? Why?
The EAR in the first case is %. (Round to one decimal place.)

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction

VIEW

Step 2: Calculation of EAR

VIEW

Step 3: Explanation of reason for highest EAR

VIEW

Solution

VIEW

Step by step

Solved in 4 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Please include the excel formula If the following is a loan, identify a) the principal amount, b) the monthly interest rate, and c) the length of the loan in months. Determine if the following situation is an investment or a loan. If the following is an investment, identify a) if it is a one-time or recurring investment, b) the number of compounding periods per year and c) the total number of compounding periods. If the following is a loan, identify a) the principal amount, b) the monthly interest rate, and c) the length of the loan in months. Ashtyn purchased new appliances for her house for a total of $5,744. The store she buys the appliances from offers an annual simple interest rate of 8.5% with no down payment and monthly payments for 3 years. This situation represents a(n) . a) b) c) What will be your monthly payments? Use Excel to calculate the value.
The principal P is borrowed and the loan's future value A at timet is given. Determine the loan's simple interest rate r to the nearest tenth of a percent. P = $3400.00, A = $3446.75, t = 3 months % (Round to the nearest tenth of a percent.)
Use the following information to solve for both the levered and unleved NPV & IRR Please note: mortgage and income numbers are to be annual numbers, not monthly Potential Investment Purchase Price Years: LTV Rate Ongination Expenses ΝΟΙ Required Return Levered Required Return Un-Levered Expected Price Appreciation) Selling expenses Expected holding period Price: Mortgage Loan Exp CFO Loan Information N IN 0 $700,000.00 30 80.0% 7.0% 3.0% $75,000.00 13,0% 10.0% 4.0% 5.0% 2 100% PV PAID ANNUALLY of the loan amount Per Year Years of the sale price Years NOI MTG Pynt CF1 PMT EV NOI MTG Pymt Net Sales Price: Mortgage Payoff CF2 Levered CF-0 CF-1 CF-2 NPV = IRR = Un-Levered CF-0 CF-1 CF-2 NPV = IRR= Equity Reversion Sale Price Selling Expenses Net Sales Price Mortgage Payoff BTER
Which statement is wrong about the PSA model for prepayment?The prepayment speed of a specific mortgage pool is affected by coupon level, age of mortgage pool, assumability, etc.The model assumes a maximum annual prepayment rate of 8%. The model assumes the prepayment rate levels off after 30 months.A specific mortgage pool could have a prepayment speed that is higher or lower than the standard PSA.
Consider a $5,000, 6%, 180-day interest-bearing note and a non-interest- bearing note for the same amount and time period with a bank discount of 6%. From the borrower’s point of view, which is the better loan and why?
A mortgage borrower has an outstanding debt at interest rate of J12= 9,08% and 1.158 TL monthly payments for 70 months remaining today. Another bank is offering the same monthly payments but for 64 months only at a lower interest rate. For the refinancing, borrower has to pay 1.900 TL expense today. Decide if the borrower should refinance the debt or not by showing the difference of discounted values of two alternatives. (hint: you must use the same interest rate for discounting two options to be able to compare)
I need help with this problem
Given the following loan information: Annual loan payment = $47,100 Number of remaining periods = 6 Interest rate = 12% What is the book value of the loan?
What are the Effects of Maturity on Monthly Payments on Fully Amortizing Loans?
Consider the sale for which the lender quoted a mortgage capitalization rate at 9.0%. If the equity capitalization rate is 15.0%, and the loan-to-value ratio is 80.0%, what is the overall capitalization rate? A. 10.2% B. 13.9% C. 24.0% D. The answer cannot be determined without the term of the mortgage.
Which of the following statements is CORRECT? Question 2 options: a) The proportion of the payment that goes toward interest on a fully amortized loan increases over time. b) An investment that has a nomiral rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. c) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. d) The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. e) if a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%.
the intereswt rate a company pays on 1 - year, 5-year loan depends on?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS