Problem 6-20 Calculating Loan Payments [LO2, 4] You want to buy a new sports cou

Question

Problem 6-20 Calculating Loan Payments [LO2, 4]

You want to buy a new sports coupe for $86,500, and the finance office at the dealership has quoted you a 6.8 percent APR loan for 60 months to buy the car.

What will your monthly payments be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What is the effective annual rate on this loan? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

You want to buy a new sports coupe for $86,500, and the finance office at the dealership has quoted you a 6.8 percent APR loan for 60 months to buy the car.

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Nper = 60 (indicates the period over which the payments are made)

PV = 86500 (indicates the value of loan)

Rate = 6.8%/12 (indicates monthly interest rate)

FV = 0 (indicates future value of loan, not relevant in this case)

PMT = ? (indicates monthly payment)

Amount of Monthly Payment = PMT(Rate,Nper,PV,FV) = PMT(6.8%/12,60,-86500,0) = 1704.65

Part B:

Effective Annual Rate of Interest = (1+R/12)^12 - 1 = (1+6.8%/12)^12 - 1 = 7.02%

Thanks.

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