Consider a 20-year monthly-payment), 8%, $80,000 mortgage with 2 points prepaid interest up front. What is the yield to maturity?

Question

Quizplus · Accepted Answer

The yield to maturity on a mortgage that includes points prepaid upfront is higher than the nominal interest rate because the borrower effectively receives less than the nominal loan amount but pays interest on the full amount. In this case, 2 points (or 2% of the loan amount) prepaid on an $80,000 mortgage reduces the actual amount received by the borrower but does not reduce the amount on which interest is calculated. Therefore, the yield to maturity is higher than the nominal rate of 8%, making 8.27% the correct answer. Calculating the exact yield to maturity would require using a financial calculator or spreadsheet to account for the effect of the prepaid points on the effective interest rate over the life of the loan.

Consider a 20-Year Monthly-Payment), 8%, $80,000 Mortgage with 2 Points