Andrew just borrowed $60000 to buy a new carrot harvester. The terms of the loan require him to make equal monthly payments for 10 years. His first payment is due in one month. If Andrew must pay $1000 per month, then what is the EAR of his loan?
Present value= $60,000
Time= 10 years*12= 120 months
Monthly payment= $1,000
The question is solved by first calculating the yield to maturity.
Enter the below in a financial calculator to compute the yield to maturity:
Press the CPT key and I/Y to compute the yield to maturity.
The value obtained is 1.3220.
Hence, the yield to maturity is 1.3220*12= 15.8640% 15.86%.
Effective annual rate is calculated using the below formula:
Where r is the interest rate and n is the number of compounding periods in one year.
= 1.1707 - 1
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