Question

2. Suppose you borrow $20,000 at an 18 percent simple interest but must repay your loan in 12 equal monthly payments.

a. Find the APR for this loan.

b. What is the corresponding EAR?

3. Suppose you deposit $20,000 in a savings account. After 210 days, you withdraw your funds. If the bank paid you $340 in interest for the 210-day period, what is your APY?

4. Suppose that the house of your dreams costs $1,200,000. You manage to scrap a 20 percent down payment. You borrow the rest from a bank. The terms of the loan are: ? 30 years ? 4.5 percent ? Monthly payments

a. Find the amount of each monthly payment.

b. Suppose you decide to sell the house after 12 years: (1) What is the loan balance at the end of 12 years? (2) What is the amount of your total payments over the 12 years? (3) What is the amount of your total principal payments over the 12 years? (4) What is the amount of your total interest payments over the 12 years?

c. Use Excel to set up an amortization table.

Answer 1

2/

a) The nominal APR is the simple-interest rate (for a year). So APR for this loan is equal to 18%.

b) The effective APR (EAR) is the fee+compound interest rate (calculated across a year). Since no fee has been mentioned for the loan and the loan will be paid in one year so compound interest rate is equal to simple interest rate. Effective APR (EAR) = 18%

3/

APY = (Interest * 100 * 365) / (Principal * number of days)
= (340 * 100 * 365) / (20000 * 210)
= 2.955%

4/
a) Amount of each monthly payment = 4864

b) (1) Loan balance at the end of 12 years = 699,408
(2) Amount of your total payments over the 12 years = 4864 * 12 * 12 = 700,416
(3) Amount of your total principal payments over the 12 years = 260,592
(4) Amount of your total interest payments over the 12 years = 495,400