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1 You want to buy an apartment for $86
1 You want to buy an apartment for $86.600 and the finiance office at the dealership has qouted you a 7.1 percent APR loan for 60 months to buy the car. What will your monthly payment be?
2
If you bought six month Treasury bill would you expect the amount of interest earned to be the same, less than or more than the stated interest rate? Why?
Expert Solution
1 Loan Amount = Present value of Monthly payment discounted at monthly rate.
APR = 7.1%/12
Number of payments = 60
86600 = Monthly Rate * ( 1/(1+0.071/12)^1 + 1/(1+0.071/12)^2 + 1/(1+0.071/12)^3 + 1/(1+0.071/12)^4 + 1/(1+0.071/12)^5 + 1/(1+0.071/12)^6 + ................... 1/(1+0.071/12)^60 )
86600 = Monthly Rate * 50.38
Monthly Rate = 1718.87 Answer
2
The amount of interest earned will be the same as the stated interest rate.
The reason is that both inflows and outflows are known with certainty. Inflow is the face value returned at the time of maturity i.e., after six months. Outflow is the price paid now. There are no intermediate cash flows and hence there is no question of reinvestment of cash flows which generally lead to the discrepancy between realised rate and stated rate.
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