Question

moulton motors is advertising the following deal on a Honda accord: monthly payments of $216.51 for the next 54 months and this beauty can be yours!" the sticker price of the car is 9,000. if you bought the car, what interest rate would you be paying in both ARP and EAR terms? what is the amortization schedule of the first six payments?

Answer 1

Amount borrowed = $9,000
Monthly payment = $216.51
Number of payments = 54

Let monthly interest rate be i%

$9,000 = $216.51 * PVIFA(i%, 54)

Using financial calculator:
N = 54
PV = -9000
PMT = 216.51
FV = 0

I = 1%

Monthly interest rate = 1%

Annual interest rate, APR = 12 * Monthly interest rate
Annual interest rate, APR = 12 * 1%
Annual interest rate, APR = 12%

Effective annual rate = (1 + Monthly interest rate)^12 - 1
Effective annual rate = (1 + 0.01)^12 - 1
Effective annual rate = 1.1268 - 1
Effective annual rate = 0.1268 or 12.68%

Amortization Schedule for first 6 payments: