Question
Marks: 17 You just bought a used car for $24,000, including taxes and license fees. You put $4,000 down and you are financing the remaining $20,000. Your loan officer says that you can get a 12% loan, compounded monthly, for five years. However, if you make the first two years of payments on time for that 12% loan, your loan interest rate will be reduced to 9%, also compounded monthly, for the remaining three years of the loan. Presuming that you qualify for the rate reduction, what would be your monthly payment during the LAST three years of the loan?
Explanation / Answer
According to the given problem, Present value = $20,000 Interest rate for first 2yrs = 12% Calculating the monthly payment amount for the first 2yrs using monthly compounding: Step1: Go to excel and click "insert" to insert the function. Step2: Select the "PMT" function as we are finding the monthly coupon payment. Step3: Enter the values as Rate = 12%/12 ; Nper = 2*12; PV = 20000 Step4: Click "OK" to get the desired value. The value comes to "$941.47" Now, calculating the monthly payment amount for the last three years after the interest rate has come to 9%. Now, the present value is the ending balance of the last 2yrs (or 24th month) Step1: Go to excel and click "insert" to insert the function. Step2: Select the "PMT" function as we are finding the monthly coupon payment. Step3: Enter the values as Rate = 9%/12 ; Nper = 3*12; PV = 8411 Step4: Click "OK" to get the desired value. The value comes to "$267.47" Therefore, the monthly payment amount for the last three years is $267 Step1: Go to excel and click "insert" to insert the function. Step2: Select the "PMT" function as we are finding the monthly coupon payment. Step3: Enter the values as Rate = 9%/12 ; Nper = 3*12; PV = 8411 Step4: Click "OK" to get the desired value. The value comes to "$267.47" Therefore, the monthly payment amount for the last three years is $267