Question

Liv will sell you a used car for $500.  The deal is, you put no money down and pay for the car in five equal annual payments that include interest at 6%.
The first payment is due one year from today!!
You called the bank and they said that they would charge you 10% for a similar loan.
1.) How much are the payments if you buy the car from Liv? a.) $100 + interest at 6% b.) $100 + interest at 10% c.) $118.70 d.) $131.90 2.) How much are you really paying for the car under Liv's deal? a.) $405.23 b.) $320 c.) $449.97 d.) $571.06 e.) none of the above 3.) If you amortize Liv's deal properly, the principal balance after the first payment will be: a.) $366.09 b.) $331.26 c.) $320 d.) $376.27 e.) none of the above

Answer 1

Ans:

Loan Amount : $500

Interest Rate = 10%

Term = 5 Years

Using Excel Function: =PMT(10%,5,500) we get annual payment = $131.90 per annum.

So correct answer is option D.

2.

Amount actually paid for CAR under LIV's deal=

Annual Payment*Term of loan = $131.90*5 = $659.50

So Correct answer is Option E. (none of the above)

3.

Principal payment after 1 year :

Loan amount : $500

Interest @10% after one year = 500*10% = $50

Installment paid = $131.90

Balance Pricipal after one year = $500+$50-$131.90 = $418.10

So Correct answer is Option E. (none of the above)