Question

A partially amortizing FRM loan with the following terms is being made: Fixed rate with 3 discount point charges, constant payments, 12% interest rate for 20 years, $100,000 mortgage amount with a balloon payment of $50,000 scheduled at the end of year 20. The borrower will prepay at the end of year 5 with one percent of prepayment penalty. What is the effective rate of interest. Show calculations using a financial calculator (i.e. I=, N=, PMT=, etc.) Hint: Answer should be 12.97% Show calculations using a financial calculator (i.e. I=, N=, PMT=, etc.) Hint: Answer should be 12.97% Show calculations using a financial calculator (i.e. I=, N=, PMT=, etc.) Hint: Answer should be 12.97% Show calculations using a financial calculator (i.e. I=, N=, PMT=, etc.) Hint: Answer should be 12.97%!!

Answer 1

USING EXCEL

Mortgage	$1,00,000.00
Interest	12%	annual
Term	20	years
PV	$1,00,000.00
RATE	1.00%
NPER	240
FV	$   50,000.00
PMT	$     1,050.54
Discount	3 points
Discount	$     3,000.00
Net loan	$   97,000.00
Loan value after 5 years	$   95,872.16
Penalty @ 1% of loan value	$       958.72
Total prepayment	$   96,830.89
PV	$   97,000.00
NPER	60.00
FV	$   96,830.89
PMT	$     1,050.54
Effective rate, RATE	1.08%
Annual rate (effective rate X 12)	12.97%