Question

Your boss has decided to let you telecommute, meaning that you can move to the Ohio River Valley and live extremely cheaply ... starting with a house that you can buy for $45,975.00. Your friendly loan officer at Marietta Community Bank informs you that the monthly payment on your 9-year loan will be $752.50. (Payments are end-of-month.) What is the effective annual rate (EAR) on this loan

Answer 1

15%

Step-by-step explanation:

This is a time value of money question which requires the calculation of the effective annual rate (EAR) on the loan.

First calculate the interest rate of the loan that is compounded monthly using the given parameters as follows :

Pv = $45,975.00

N = 9 × 12 = 108

Pmt = - $752.50

P/yr = 12

Fv = $ 0

i = ?

Interest Compounded Monthly = 14.0579 %

Effective = 15% (using a financial calculator)