Question

suppose you want to borrow some money for two years. You can repay the loan with single payment of 100000 in two year's time. the lending institution determines that there is a 6% chance that you will not repay the loan. the normal lending rate at that time is 12% per annum. How much will the lend? if you repay the loan in full, what rate of interest was charged?

Answer #1

1. The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage.

In the given case, LTV is given at 94% (100% - 6%).

To find the loan amount,

LTV formula is as follows:

LTV = Loan amount ÷ Appraised value.

0.06 = x ÷ 1,00,000

Therefore, solving the above equation, loan amount wil be 94,000.

2. If the loan is fully repaid,

Effective interest rate would be,

Loan repayment: (1,00,000+12%+12%) = 1,25,440.

Therefore, {(1,25,440 / 1,00,000) - 1} = 25.44%

Per annum = 25.44/2

=12.72%

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