Question

You wish to buy a car for $25,000. The dealer offers you a 4-year loan with 2% interest. About what are your monthly payments? $539.27 $553.36 $542.38 $547.71 Bank A has a 1 year loan for 6% compounded annually. Bank B has a loan for 5.9% compounded monthly. Which loan would you select for your business? Bank A: 6% nominal interest is a better rate than Bank B nominal interest. Bank B: 5.9% nominal interest is a better rate than Bank A 6% nominal interest. Bank A: the effective rate of 6.00% is better than Bank B effective rate. Bank B: the effective rate of 5.96% is better than Bank A effective rate. You want $100,000 in a savings account in 10 years to buy your dream car. You plan to invest $10,000 into the account each year. About what interest rate must you earn to buy your dream car? 18.5% 21.5% 19.4% 0.0%

Answer #1

a) Monthly payment can be calculated using PMT function

N = 4 x 12 = 48, I/Y = 2%/12, PV = 25,000, FV = 0

=> Compute PMT = $542.38 is the monthly payment

b) EAR = (1 + APR/n)^n - 1

For Bank A, EAR = (1 + 6%/1)^1 - 1 = 6%

For Bank B, EAR = (1 + 5.9%/12)^12 - 1 = 6.06%

Hence, Bank A effective rate is better than Bank B effective rate.

c) Interest rate can be calculated using I/Y function

N = 10, PMT = -10,000, FV = 100,000, PV = 0

=> Compute I/Y = 0.00%

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