You take out a $7,300 car loan that calls for 60 monthly payments starting after

Question

You take out a $7,300 car loan that calls for 60 monthly payments starting after 1 month at an APR of 12%. a. What is your monthly payment? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Monthly payment b. What is the effective annual interest rate on the loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Effective annual interest rate c. Now assume the payments are made in four annual year-end installments. What annual payment would have the same present value as the monthly payment you calculated? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Annual payment

Explanation / Answer

a What is your monthly payment? We would calculate monthly payment by using PMT in excel Monthly Int = 12%/12 0.01 NPER 60 PV $7,300 PMT(1%,60,7300) ($162.38) Monthly Payment $162.38 b What is the effective annual interest rate on the loan? Monthly interest Rate = 12%/12 0.01 Effective Interest Rate = (1+r)^12 - 1 (1.01)^12 - 1 1.1268-1 12.68 Effective annual interest rate 12.68% c Now assume the payments are made in four annual year end installments. What annual payment would have the same present value as the monthly payment you calculated Using the PMT in excel we can calculate the annual payment i 12.68% PV $7,300 NPER 4 PMT(12.68%,4,7300) ($2,437.92) Annual Payment $2,437.92

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