Question

1. What is the effective rate of interest on a CD that has a nominal rate of 11.5 percent with interest compounded monthly?

A.10.92%

B.12.74%

C.11.02%

D.12.13%

2. You are considering buying a new car costing $15,000. You wish to pay $2,000 down payment and finance the rest with a 3-year loan at annual interest rate of 12%, to be paid back with monthly payments. What are your monthly car payments?

A.$316.67

B.$352.34

C.$276.21

D.$385.78

E.$431.79

Answer 1

Ques-1)

Calculating the Effective Rate of Interest of Nominal rate with interest compounded monthly:-

where, r = Nominal Return = 11.5%

m = no of times compounding = 12

= 1.121259 - 1

= 12.13%

Hence, Option D

Ques-2)

New Car costing = $15,000

Down-payment = $2,000

Loan Amount = $15,000 - $2,000

=$13,000

Calculating the Monthly car Payments:-

Where, P = Loan Amount = $13,000

r = Periodic Interest rate = 12%/12 = 1%

n= no of periods = 3 years*12= 36

Monthly Payment = $431.79

Hence, Option E