Chapter 5b xC Two Banks In The Area Offer 3 x C eztomheducat

Chapter 5b xC Two Banks In The Area Offer 3 x C ezto.mheducation.com/hm.tpx FINANCE Chapter 5b instructions I help Question 16 (of 23) Save & ExitSubmit 6.00 points You did not receive full credit for this question in a previous attempt Two banks in the area offer 35-year, $255,000 mortgages at 6.2 percent and charge a S4,200 loan application fee. However, the application fee charged by Insecurity Bank and Trust is refundable if the loan application is denied, whereas that charged by I. M. Greedy and Sons Mortgage Bank is not. The current disclosure law requires that any fees that will be refunded if the applicant is rejected be included in calculating the APR, but this is not required with nonrefundable fees (presumably because refundable fees are part of the loan rather than a fee). What are the APRs on these two loans? What are the EARs on these two loans? (Do not round intermediate calculations and round your final answers to 2 decimal places. (c.g., 32.16)) Insecurity Bank and Trust (Refundable) I. M. Greedy and Sons Mortgage Bank (Not refundable) EAR APR References eBook & Resources Worksheet Difficulty: Challenge

Solution

Soln : For both the loans we have to pay EMIs that means compounding monthly.

EAR in case IM Greedy & Sons Mortgage Bank the loans will be = (1+6.2%/12)¹² -1 = 6.38%,as that will not change with application fee.

In case of insecurity bank and trust bank the money is refundable and part of the loan which means that application fee is part of loan, hence net amount borrowed = 255000+4200 = $259200

So, for 35 year amount borrowed = 259200, EMI = 16070.40 , using 35 years and rate as 6.2%

Now, we again will calculate the rate using PV = 255000, using excel formula = rate(420,16070.40,-255000,0) = 6.30%

For insecurity bank and trust bank APR = 6.30%

EAR for this loan will be = (1+6.30/12)¹²-1 = 6.485%

	Insecurity Bank and trust	IM Greedy & Sons Mortgage Bank
EAR	6.49%	6.38%
APR	6.30%	6.20%