You're about to buy a new car for $10,000. The dealer offers you a one-year loan...
You're about to buy a new car for $10,000. The dealer offers you a one-year loan where you pay $882.88 every month for the next 12 months. Since you pay $882.88 * 12 = $10,595 in total, the dealer claims that the loan's annual interest rate is (10,595-10,000)/10,000 = 5.95%.
What is the actual effective annual rate?
What rate should the dealer quote by law? (in decimals)
Homework Answers
Annual effective rate (EAR) = (1+ APR/12)^12 -1
= (1+ 5.95%/12)^12 -1
= 6.114 %
PV of loan = $10,000
Payment every month (PMT) = $882.88
Number of months(nper) = 12
Rate needed to be quoted by dealer as per law (rate) =
![=RATE(12,-882.88,10000) RATE(nper, pmt, pv, [fv], [type] (guess])](http://img.homeworklib.com/questions/17f16590-dc2d-11ea-b326-d55d9c83b404.png?x-oss-process=image/resize,w_560)
= 0.9% per month = 10.8% pa
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