You have just purchased a home by borrowing \$400,000$400,000 for 30-years at a fixed APR of 3.87\%3.87%. The loan payments are monthly and interest is compounded monthly.
What is the effective annual rate on the loan?
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Answer:
a. .0387/12 = .003225 = .3225%/month
b. (1 + .003225)^12 - 1 = 1.039393874 - 1 = .039393874 = 3.9393874% (note how this is slightly larger than 3.87%)
c. The formula to solve this is P r/(1 - ((1/(1+r))^n)
400000 * .003225 / (1 - ((1/(1+.003225 ))^360) = 1879.80
We can also use the formula in Excel = PMT(.0387/12, 360, 400000) = 1879.80
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