You are looking at a one-year loan of $10,000. The interest rate is quoted as 8 percent plus three points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are very common with home mortgages. The interest rate quotation in this example requires the borrower to pay three points to the lender up front and repay the loan later with 8 percent interest. What rate would you actually be paying here? What is the EAR for a one-year loan with a quoted interest rate of 11 percent plus two points? Is your answer affected by the loan amount?
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