Interest/Year =

Points = 0

Due =

Term =

Periods/Year = 12

Penalty = 0

Effective Rate =

Converts nominal (or stated) interest rates into Effective Interest Rates by giving consideration to the impact of prepaid interest in the form of points, and deferred interest in the form of prepayment penalties.

- Interest/Year: Stated (or nominal) interest rate of the loan expressed as a percentage.

- Points: Points or prepaid interest expressed as a percentage. One point equals one percent.

- Due: When the loan becomes due. May be the entire amortization term, or the number of years prior to the full amortization period for balloon loans.

- Term: Term of the loan. Determines the full amortization period for the loan.

- Periods/Year: Number of compounding and payment periods per year.

- Penalty: Prepayment penalty expressed as a percentage.

- Effective Rate: Effective interest rate expressed as a percentage.

We need to determine a 4-year loan with a 2-year balloon payment. Payments are monthly. The loan is 12% interest rate and 2 points. Pre-payment penalty is 10%. What's the effective interest rate?

- Interest/Year: 12.0%

- Points: 2.0%

- Due: 2 years

- Term: 4 years

- Periods/Year: 12

- Penalty: 10.0%

The rate is 16.4%.

Interest/Year

Points

Due

Term

Periods/Year

Penalty

Effective Rate

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