Question

Assume a dealer is offering a last-year passenger car model for $23,700 today or 4 year...

Assume a dealer is offering a last-year passenger car model for $23,700 today or 4 year financing terms for $125 weekly payment (a total of 209 payments with the first payment made now). For the dealer, it does not make an economic difference if the customer chooses any of these two options (options are equivalent).

[a] What is the effective annual interest rate (ieff = ?) implied in this offer assuming that compounding is weekly?

[b] If the buyer is interested more in monthly payment instead of weekly, how much this monthly payment is expected to be using the same interest rate in [a] and assuming, still, that compounding is weekly?

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Homework Answers

Answer #1

Part (A)

weekly interest rate is 0.0944%

assuming there are 52 weeks in a year

effective annual interest rate is 5.029%

Part (B)

if buyer is interested in monthly payments rather than weekly payments

first we find monthly interest rate

monthly interest rate payment is 0.409%

monthly payment will ber around $ 533.25

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