Question

Show calculation of how to solve the problems (hand calculation instead of excel)

1a) Bubba bought a car for $60,000, putting down $20,000 cash and financing the remainder. How much are his monthly car payments if he financed the car for 6 years and paid a nominal annual interest rate of 6 percent?

1b) How much will his payments be if he makes the payments at the beginning of each month?

Answer 1

Since the payments are monthly, first let's get the monthly effective rate.

Monthly effective rate = ( 1 + 0.06)^ (1 month / 12 months) - 1

Monthly effective rate = (1.06)^(1/12) - 1

Monthly effective rate = 1.0048675506 - 1

Monthly effective rate = 0.0048675506 = 0.48675506%

a) Loan amount = Car price - down payment = 60,000 - 20,000 = 40,000. This is the PV.

n = 6 years * 12 payments = 72 payments

PMT = $659.9186

b) If the payments are made at the beginning of each month, then the new payments will be

PMT (beg) = PMT(end) / (1 + r)

PMT (beg) = 659.9186 / (1 + 0.0048675506)

PMT (beg) = $656.7219