Annual Percentage Rate and Decimal Places
Time Value of Money 1) A store offers two payment plans. Under the installment plan, you pay 20% down and 20% of the purchase price in each of the next 4 years. If you pay the entire bill immediately, you can take a 5% discount from the purchase price. | a. | Calculate the present value of the payments, if you can borrow or lend funds at a 7% interest rate. Assume the product sells for $100. (Do not round intermediate calculations. Round your answer to 2 decimal places.) | Present value | $ | b. | Calculate the payment net of discount. | Payment net of discount | $ | c. | Which is a better deal? | | | | | Pay the entire bill immediately | | Installment plan | |
2) Home loans typically involve “points,” which are fees charged by the lender. Each point charged means that the borrower must pay 1% of the loan amount as a fee. For example, if the loan is for $170,000 and 4 points are charged, the loan repayment schedule is calculated on a $170,000 loan but the net amount the borrower receives is only $163,200. What is the effective annual interest rate charged on such a loan assuming loan repayment occurs over 156 months? Assume the interest rate is .75% per month. (Do not round intermediate calculations. Round your answer to 2 decimal places.) | Effective annual interest rate | % |
3) Suppose you take out a $1,000, 4-year loan using add-on interest with a quoted interest rate of 23.25% per year. |
a. | What will your monthly payments be? (Total payments are $1,000 + $1,000 × .2325 × 4 = $1,930.) (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
Monthly payments | $ |
b. | What are the true APR and effective annual rate on this loan? (Do not round intermediate calculations. Round your answers to 3 decimal places.) |
| APR | % | Effective annual rate | % | | |
4) In a discount interest loan, you pay the interest payment up front.
2) Home loans typically involve “points,” which are fees charged by the lender. Each point charged means that the borrower must pay 1% of the loan amount as a fee. For example, if the loan is for $170,000 and 4 points are charged, the loan repayment schedule is calculated on a $170,000 loan but the net amount the borrower receives is only $163,200. What is the effective annual interest rate charged on such a loan assuming loan repayment occurs over 156 months? Assume the interest rate is .75% per month. (Do not round intermediate calculations. Round your answer to 2 decimal places.) | Effective annual interest rate | % |
3) Suppose you take out a $1,000, 4-year loan using add-on interest with a quoted interest rate of 23.25% per year. |
a. | What will your monthly payments be? (Total payments are $1,000 + $1,000 × .2325 × 4 = $1,930.) (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
Monthly payments | $ |
b. | What are the true APR and effective annual rate on this loan? (Do not round intermediate calculations. Round your answers to 3 decimal places.) |
| APR | % | Effective annual rate | % | | |
4) In a discount interest loan, you pay the interest payment up front.