Question

LOAN AMORTIZATION AND EAR You want to buy a car, and a local bank will lend you $20,000. The loan will be fullly amortized over 5 years (60 months), and the nominal interest rate will be 10% with interest paid monthly a. What will be the monthly loan payment? Do not round intermediate steps. Round your answer to the nearest cent. b. What will be the loan's EAR? Do not round intermediate steps. Round your answer to two decimal places.

Answer 1

Given,

Loan Amount = $ 20000

Interest rate = 10% or 0.10

Loan Period = 5 years

For calculating Monthly Payments, we have to take the interest rate and number of periods on a monthly basis.

So, Interest rate (r) = 0.10/12 = 0.0083333

Number of periods (n) = 5 years x 12 months = 60 months

Here's the solution : -

a calculation of monthly Loan payment ? P = Lollton Where, payment P = monthly loan 2= Loan Amount 8= Interest rate per period n = No. of Periods po 20000 (0.0083333 (1+0.0083333)60) (1+0.0083333) 5° -1 - 20000 / 0.0083333 (1.6453) 1.6453 - 1 20000 x 0.0137108 0.6453 124.94 Monthly Loan Payment = $424.94

b) Annual Rate) Calculation of EAR(Effective EAR= (1+8"-| where, EAR ê Effective Annual Rate x= Interest rate per period n = No. of Periods in a year Now, o 0. - 0.0083333 12 months n = 12 months (1+ 0.0083333) - EAR = - 1.104713 -1. - 0.104713 or 10.4713 % EAR= 10.4713 %.