Question

5. Ted was given a choice of loans of $8,000 with the following characteristics:

1. a) $1,200 in interest paid at the end of the period

2. b) $1,200 in interest paid at the beginning of the period

3. c) $1,200 paid equally over the period with part of the principal retired each month

Calculate the interest rate paid. In part (3) calculate using both the approximate method and the actual cost method assuming a one-year loan retired in 12 equal monthly installments of interest and principal.

Answer 1

Requirement-(a Interest rate charged Interest paid/ Loan amount (when interest is paid at the end of the period of 1 year) Interest paid Loan amount Interest rate charged $1,200 $8,000 15.00% [$1,200 / $8,000] amount- Interest paid)(when interes is aid at the beginning of the period of 1 yeart) $1,200 Interest paid Loan amount$8,000 Interest rate charged7.65 [$1,200 / ($8,000-$1,200-$1,200 / $6,800-17.65%) - -

Requirement-(C # of months of repayment, NPER Monthly payments, PMT Amount borrowed, PV Bal. in loan account at the end, FV Monthly payment type, TYPE Interest rate charged 12 $1,200 $8,000 $0 [Because all will be paid off over 12 months] 0 0 if installments paid at the end of of each month; 1 if installments paid at the beginning of each month 10.45% [Ref: NOTE NOTE Interest rate charged is calculated using EXCEL FUNCTION RATE (nper,pmt,pv,fv,type) where nper-12; pmt--1200; pv-8000; fv-0; type 0; Here, value for pmt is negative as it denotes cash outflow; pv is positive as it denotes inflow; type 0 as installments paid at the end of each month only 1 # of months of repayment, NPER 2 Monthly payments, PMT 3 Amount borrowed, PV 4 Bal. in loan account at the end, FV 5 Monthly payment type, TYPE 6 Interest rate charged 12 $1,200 $8,000 O [Because all will be paid off over 12 months] 00 if installments paid at the end of of each month; 1 if installments paid at the beginning of each month -RATE(B1,-B2,B3,B4,B5) [Ref: NOTE]