Problem Set 1
1. James wants to buy a property for $105,000 and wants an 80 percent loan for $84,000. A lender
indicates that a fully amor�zing loan can be obtained for a 30 year term at a 6 percent APR
(compounded monthly). Unfortunately, a loan fee of $3,500 will also be necessary for James to
obtain the loan.
a. How much will the lender actually disburse?
b. What is the effec�ve cost of the borrowing for James, assuming the mortgage is paid-off
a�er 30 years?
c. What is James’ outstanding balance at the end of 15 years?
2. Peter receives a loan for $50,000 for 10 years at an 8 percent APR. Unusually, however, no
monthly payments are scheduled.
a. How much will be due at the end of the 10 years?
b. If Peter buys 1 point (and receives a reduced APR of 7.75 percent), what will his effec�ve
cost of borrowing be?
3. John receives a par�ally amor�zing loan for $90,000 for 10 years at 6 percent interest. Payments
are due monthly and a balance of $20,000 will remain and be due at the end of year 10. Assume
that, in order to receive the 6 percent APR, John must pay 2 points.
a. What is the effec�ve cost of borrowing on this loan for John?
b. What is the balance outstanding at year 4?
c. How can you calculate this without building an en�re amor�za�on schedule?