Question

You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 35-year mortgage for 85 percent of the $4,100,000 purchase price. The monthly payment on this loan will be $18,200. what is the apr and ear of this loan?

Answer 1

Information provided:

Purchase price= $4,100,000

Mortgage= 85%*$4,100,000= $3,485,000

Monthly payment= $18,200

Time= 35 years*12= 420 months

The question is solved by first calculating the monthly interest rate.

The monthly interest rate is calculated by entering the below in a financial calculator:

PV= -3,485,000

PMT= 18,200

N= 420

Press the CPT key and I/Y to compute the monthly interest rate.

The value obtained is 0.4394.

Therefore, the annual rate of return is 0.4394*12= 5.2731% 5.27%.

Effective annual rate is the rate of interest an investor earns in a year after accounting for the effects of compounding.

It is calculated using the below formula:

EAR= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

EAR= (1 + 0.0527)^12 - 1

= 1.053992 - 1

= 0.053992*100

= 5.3992% 5.40%.

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