1. You borrow $10,000 from a bank. The loan is with 12% compounded monthly You h
ID: 1138174 • Letter: 1
Question
1. You borrow $10,000 from a bank. The loan is with 12% compounded monthly You have 2 years to pay back the loan. a. What is the nominal interest rate? b. What is the effective interest rate? c. If you wait until the end of year 2 to pay it off in one lump sum, how much must you pay? Use the "period interest rate" approach. d. If you wait until the end of year 2 to pay it off in one lump sum, how much must you pay? Use the "effective interest rate" approach e. Of your payment in parts (c) or (d), how much is interest? f. Suppose you make equal end-of-month payments. How much is the monthly amount?Explanation / Answer
(a) Nominal (monthly) interest rate = 12%/12 = 1%, and nominal (annual) interest rate = 12%
(b) Effective interest rate (EAR) = [1 + (r/N)]N - 1, where N: Number of compounding periods per year
EAR (annual) = [1 + (0.12/12)]12 - 1 = (1 + 0.01)12 - 1 = (1.01)12 - 1 = 1.1268 - 1 = 0.1268 = 12.68%
EAR (monthly) = 12.68%/12 = 1.0567%
(c) Amount payable ($) = 10,000 x (1.12)2 = 10,000 x 1.2544 = 12,544
(d) Amount payable ($) = 10,000 x (1.1268)2 = 10,000 x 1.2697 = 12,697
NOTE: As per Answering Policy, 1st 4 parts have been answered.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.