Question

You needed $10,000 and obtained the following loan: Loan specifics: You are expected to pay 24...

You needed $10,000 and obtained the following loan:

Loan specifics: You are expected to pay 24 equal monthly installments ($A per month) at APR 12%, compounded monthly, starting from a month from obtaining the loan. If you miss a payment, your APR goes up to 24%, duration of the loan does not change but your monthly fixed payments go up.

You miss your 12th payment. On the day of your 13th payment, the bank offers you a new deal. If you pay an additional $820 at the time of your 13th payment, you will continue to make your payments as before with no interest hike.

a) Would you prefer to make the additional payment or have the interest hike?

b) What is the internal rate of return of the choice you made in part (a)? (Hint: What is the cash flow with your choice and without your choice)

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