Annual Percentage Rate and Decimal Places

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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.

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