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If a lender charges 8% interest plus 2

points, what is the approximate yield on
the loan?
a. 9.00%
b. 8.50%
c. 8.25%
d. 8.13%

1 Answer

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Final answer:

The approximate yield on a loan with 8% interest plus 2 points cannot be calculated without information on the loan term. Points are prepaid interest and paying points typically increases the annual rate above the nominal interest rate.

Step-by-step explanation:

If a lender charges 8% interest plus 2 points, the approximate yield on the loan depends on how the points affect the total cost of the loan over its term. Points are a form of prepaid interest; one point is equal to 1% of the loan amount. Therefore, 2 points on a loan would equal 2% of the loan amount paid upfront.

To calculate the approximate yield, we need to consider the effect of these points on the annual interest rate. However, since there is not enough information provided to calculate the exact yield, such as the term of the loan, we cannot provide an accurate calculation. Typically, paying points upfront effectively increases the annual interest rate above the nominal rate because the lender is receiving more money upfront.

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