A borrower takes out a 30-year price level adjusted mortgage loan for $200,000 with monthly payments. The initial interest rate is 4% with 4 points. Assuming that inflation is expected to increase at the rate of 3% for the next 5 years, and a fully amortizing loan is made. What is the expected effective yield to the lender if the loan is repaid in 2 years

Effective yield = 7%

Explanation:

Determine the expected effective yield to the lender if Loan is repaid in 2 years

Effective annual yield =  

n = 12 months

IRR = 0.57%

hence expected effective yield to Lender if Loan is repaid in 2 years

≈ 0.07 = 7%

Use Excel to determine the IRR Function

From the table below the IRR value = 0.57%

Below is  a table showing  the Year and CF values

YearCF

0-200,000

1$954.83

2$954.83

3$954.83

4$954.83

5$954.83

6$954.83

7$954.83

8$954.83

9$954.83

10$954.83

11$954.83

12$954.83

13$983.48

14$983.48

15$983.48

16$983.48

17$983.48

18$983.48

19$983.48

20$983.48

21$983.48

22$983.48

23$983.48

24$205,538.11

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