Joe obtains a car loan of $5,000 on Jan 1 1994, from Wheel Co to be paid in 36 m

Question

Joe obtains a car loan of $5,000 on Jan 1 1994, from Wheel Co to be paid in 36 monthly installmens at 12% nominal interest rate compounded monthly. The first payment due in one month. After the 14th payment, Wheel Co sells the remainder of the loan to anothher company for a price that will yield Wheel Co a 10% effective anual yield. Determine the price the new company will pay for the loan.

A <2400, B >2400 but < 2500, C >2600 but <2800, D >2800 but <3000, E >3000

Please no excel spreadsheets.

Explanation / Answer

Compute the monthly payment amount using the excel function.

months = 36 months, interest rate = 12%/12 = 1%.

PMT = Pmt(Rate,NPER,PV,FV) = =PMT(0.01,36,-5000) = $166 payment.

Therefore, monthly payment is $166.

Compute the future value taking the Nper 14.

FV = FV(Rate, Nper,PMT) = =FV(0.01,14,-166.07) = $2.482.32.

Yield = 2,482.32 * 10% * 14/12 = $289.60.

Therefore, sale price to another company to earn an yield of 10% is $2,482.32+$289.60 is $2,771.92.

Therefore the correct answer is option C.

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