You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 30-year mortgage loan for 80 percent of the $3,000,000 purchase price. The monthly payment on this loan will be $14,000 starting 1 month from today.
a) What is the periodic rate on this loan?
b) What is the nominal rate of this loan?
c) What is the effective rate on this loan?
If you use a financial calculator please show the steps. Thank you.
a.Information provided:
Price of the warehouse= $3,000,000
Mortgage= present value= 0.80*$3,000,000= $2,400,000
Monthly payment= $14,000
Time= 30 years*12= 360 months
The monthly interest rate is calculated by entering the below in a financial calculator:
PV= -2,400,000
PMT= 14,000
N= 360
Press the CPT key and I/Y to compute the monthly interest rate.
The value obtained is 0.4789.
Therefore, the periodic interest rate is 0.4789%.
b.Nominal interest rate = 0.4789%*12= 5.7462%
c.Effective annual rate 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+0.05762/ 12)^12 - 1
= 1.0590 - 1
= 0.0590*100
= 5.90%.
In case of any query, kindly comment on the solution.
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