Question

2-1 On a loan for $25,000 to purchase a new car, what are the monthly payments at an annual interest rate of 6% (0.5% per month) paid over four years? 2-2 You borrow $20,000 at an annual interest rate of 8%. You will pay the loan back in two equal payments at the end of year 1 and year 4. a. Calculate the amount to be paid each year using the factor tables b. Draw the fully labeled cash flow diagram. c. Complete the following table: BOY Balance Interest amount (BOY + Interest) Payment Total EOY EOY Balance Year f) 2 4

Answer 1

(2.1)

Monthly (nominal interest rate) = 0.5% (= 0.005)

Number of months = 12 x 4 = 48

Monthly payment ($) = Loan amount /P/A(0.5%, 48) = $25,000 / 42.5803** = $587.13

**P/A(r%, N) = [1 - (1 + r)^-N] / r

P/A(0.5%, 48) = [1 - (1.005)^-48] / 0.005 = (1 - 0.7871) / 0.005 = 0.2129 / 0.005 = 42.5803

NOTE: As per Answering Policy, 1st question is answered.