What is the yield to the lender when three points are paid on a note with a rate of 6%?

To determine the yield to the lender when three points are paid on a note with a 6% interest rate, it is important to understand how points affect the effective yield.

Points are upfront fees paid to the lender when obtaining a loan, with one point equating to 1% of the loan amount. In this case, three points means that the borrower pays 3% of the loan amount upfront. This upfront payment increases the yield to the lender because they are receiving additional funds immediately, which effectively lowers the cost of the loan for the lender over its term.

The basic yield on the note is 6% based on the interest rate charged; however, the yield to the lender increases due to the impact of these points. Since three points are being paid, you must add to the effective yield. This typically results in a yield that exceeds the nominal interest rate.

In this specific scenario, the yield can be calculated or derived through standard financial formulas or tables that account for points and their impact on yield. After performing the necessary calculations, it is determined that the appropriate effective yield incorporating the three points on a 6% note is 6 3/8%.

Understanding how points influence the yield is crucial for lenders to assess the true return