Question

You are looking at a one-year loan of $10,000. The interest rate is quoted as 10 percent plus 4 points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay 4 points to the lender up front and repay the loan later with 10 percent interest.

What rate would you actually be paying here?

Answer 1

The correct option is _e)_15.79%_

Upfront Cost=Loan Amount×Percentage of Points=$10,000×5%=$500Upfront Cost=Loan Amount×Percentage of Points=$10,000×5%=$500

Net Amount Received=Loan Amount−Upfront Cost=$10,000−$500=$9,500Net Amount Received=Loan Amount−Upfront Cost=$10,000−$500=$9,500

Amount Repayable=Loan Amount×(1+Interest Rate)=$10,000×(1+10%)=$11,000

Step-by-step explanation:

Compute the actual rate by putting the values of number of years, amount repayable and the net amount received in the Rate function

Answer 2

Answer: 14%

Step-by-step explanation:

The actual rate you would be paying here is 14%. This is because the quoted rate of 10% plus 4 points means that you are paying an additional 4% (4 points) on top of the 10% interest rate. This effectively increases the interest rate to 14%.