2) You have just purchased a home and taken out a $490,000 mortgage. The mortgag

Question

2) You have just purchased a home and taken out a $490,000 mortgage. The mortgage has a 30-year term with monthly payments and an APR of 4.88%. How much will you pay in interest and how much will you pay in principal during the first year? How much will you pay in interest and how much will you pay in principal during the 20th year? (ie: between 19 and 20 years from now)

3) You need a new car and the dealer has offered you a price of $20,000 with the following payment options (a) pay cash and receive a $2,000 rebate, or (b) pay a $5,000 down payment and finance the rest with a 0% APR load over 30 months. But having just quit your job and started an MBA program you are in debt and you expect to be in debt for at least the next 2 1/2 years. You plan to use credit cards to pay your expenses; luckily you have one with a low (fixed) rate of 14.67% APR.Which payment option is best for you? Your monthly discount rate is ___%?

5) Fred bought a boat and brags about the low 6.9% interest rate (APR, monthly compounding) he obtained from the dealer. The rate is even lower than the rate he could have obtained on his home equity laond (7.8%APR, monthly compounding)But if his tax rate is 28% and hte interest on the home equity loan is tax deductable, which loan is truly cheaper? The after-tax cost on the home equity loan is___%

6) Your friend has a tax rate of 40% and has the following debts: car loan with an outstanding balance of $5,000 and a 4.81% APR (monthly compounding), credit cars with an outstanding balance of $10,000 and a 14.99% APR (monthly compounding), savings account with a $30,000 balance paying 5.43% EAR, Money market savings with $100,000 balance paying 5.28% APR (daily compounding), and a tax deductible home equity loand with an outstanding balance of $25,000 and a 5.07% APR (monthly compounding) Which saving account pays a higher after tax interest rate? Regular savings pays ___% Money Market pays ___%

Explanation / Answer

5) Because the taxes are usually paid annually, we first convert the home equity loan to an EAR to determine the actual amount of interest during that year. The after tax cost of home equity loan, which is tax-deductible, is [(1+0.078/12^12-1](1-0.28) or 6.24%. The dealer's boat loan has a cost of [(1+0.069/12^12-1]=7.77%. Hence the after tax cost of home equity loan is cheaper at 6.24% than the dealer’s boat loan at 7.77%.

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