Question

Liv will sell you a used car for $500.  The deal is, you put no money down...

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

Homework Answers

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)

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