A $10 million principal amount, 3-year, term loan carries an interest rate of 10 percent. All interest payments (which would normally be due at the end of each year) are deferred until the end of three years. The unpaid interest amount compounds at a 10 percent annual rate during the period(s) it remains unpaid.
At the end of three years, the borrower must repay the principal amount, the deferred interest, plus interest on the deferred interest.
The lender also charges a front-end loan origination fee on this loan of $100,000. Compute the effective cost of this loan.