Question

USE FINANCIAL CALCULATOR ONLY! (N= I= PV= FV= PMT= ) Andy Co. borrows $640,000 and will pay it back in 12 equal installments over the year (every month). The interest on this loan is $51,200 which will also be paid back in 4 equal installments. The effective interest rate on this laon is:

a. 12.60%

b. 3.15%

c. 15.39%

d. 8%

e. 13.21%.

THANK YOU!

Answer 1

Given that,

Andy Co. borrows = $640000

payback it in 12 equal monthly installments

interest = $51200 which will also be paid back in 4 equal installments

So, quarterly interest = 51200/4 = $12800

So, it is like paying 12800 every 3 month ans 640000/4 = $160000 every 3 month

Total period left = 4 quarters

Use following values on financial calculator

PV = -640000

N = 4

PMT = 160000+12800 = $172800

FV = 0

Compute for I/Y, we get I/Y = 3.15

So, quarterly rate = 3.15%

So, Effective annual rate = (1 + quarterly rate)^quarters - 1 = (1 + 0.0315)^4 - 1 = 13.21%

Option e is correct.