You want to buy a car, and a local bank will lend you $20,000

Finance Nov 18, 2020

You want to buy a car, and a local bank will lend you $20,000. The loan would be fully amortized over 5 years (60 months). and the nominal interest rate would be 12 percent.
a) What would be the monthly loan payment.

b) What would be the loan's EAR?
Answer must be rounded at 2 decimals

Expert Solution

a) We can calculate the monthly loan payment by using the following formula in excel:-

=pmt(rate,nper,-pv,fv)

Here,

Pmt = Monthly loan payment

Rate = 12%/12 = 1% (monthly)

Nper = 5*12 = 60 periods (monthly)

PV = $20,000

FV = $0

Substituting the values in formula:

= pmt(1%,60,-20000,0)

= $444.89

b) Computation of the EAR:-

EAR = (1+rate/n)^n-1

= (1+12%/12)^12-1

= 1.1268 - 1

= 12.68%

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