Suppose you are the manager of a mortgage department at a savings bank. Under the state usury law, the maximum interest rate allowed for mortgages is 10 percent compounded annually.

a. If you granted a $ 50,000 mortgage at the maximum rate for 30 years, what would be the equal annual payments?
b. If the current market internal rate on similar mortgages is 12 percent, how much money does the bank lose by issuing the mortgage described in (a)?
c. The usury law does not prohibit banks from charging points. One point means that the borrower pays 1 percent of the $ 50,000 loan back to the lending institution at the inception of the loan. That is, if one point is charged, the repayments are computed as in (a), but the borrower receives only $ 49,500. How many points must the bank charge to earn 12 percent on the 10 percent loan?

  • CreatedDecember 15, 2014
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