Question

14. A firm borrowed $50,000 from a mortgage bank. The terms of the loan specify quarterly payments for a 10-year period. If payments to the bank are $3750 per quarter, what effective annual interest rate is the firm paying

Answer 1

Answer:

28%

Explanation:

Borrowed amount = B = $50,000

Duration = n = 10

Number of installment paid = 40

Installment = I= $3,750 per quarter

Effective interest rate = (I*N/B)^(1/n) / 4

Effective interest rate = (3,750*40/50,000)^(1/30) / 4

Effective interest rate = 0.28

Effective interest rate = 28%