Some Home Loans Involve "Points," Which Are Fees Charged by the Lender.Each

question 20

Essay

Some home loans involve "points," which are fees charged by the lender.Each point charged means that the borrower must pay 1% of the loan amount as a fee.For example,if 0.5 point is charged on a $100,000 loan,the loan repayment schedule is calculated on the $100,000 loan,but the net amount the borrower receives is only $99,500.What is the effective annual interest rate charged on such a loan,assuming that loan repayment occurs over 360 months,and that the interest rate is 1% per month?

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Definitions:

Contingent Liability

A potential obligation that may arise in the future, dependent on the occurrence of a specific event.

Financial Statement

Documents that provide an overview of a company's financial condition, including balance sheets, income statements, and cash flow statements.

Expense Recognition Principle

An accounting standard that expenses should be recognized in the period in which they are incurred, regardless of when payment is made.

Warranty Costs

Expenses incurred by a company to repair or replace products under warranty.