Financial, Commercial, and Mortgage Mathematics and Their Applications by Arun J. Prakash & Dilip K. Ghosh

Author:Arun J. Prakash & Dilip K. Ghosh [Arun J. Prakash]
Language: eng
Format: epub
ISBN: 9781440830945
Publisher: ABC-CLIO

Answer: Note that i = k/m and r = 0.125/12 = 0.010467. Applying equation (12.12), we have:

For problem (a),

For problem ( b),

For problem (c),

Note that the answer for (c) is negative. It means that the lender will pay an incentive of 18.47563% of the original loan to the buyer.

Example 12.5: What is the effective rate of interest if the contractual rate is 12% and discount points of 3.62126 are charged on a 30-year mortgage?

Answer: From Example 12.4, we know that the true effective rate is 12.5%. However, applying equation (12.13), we can derive the approximate yield as

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