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4. You have a credit card account that charges interest at the rate of 1.45% per month a. What is APR? EAR? b. In this month's statement, you found out that your credit card company changed its policy. It now charges interest at the rate of 0.0475% per day and claims that it provides better rate than before, since its new APR is lower than previous APR. Do you agree? Are you better or worse off? Show your calculations. 5. Monica Brighton, your aunt, left you the sum of $5,000 a year forever with payments starting next year in her will. However, the news is better. She has specified that the amount should grow at 5% per year to maintain purchasing power. Given an interest rate of 12%, what is the PV of the inheritance? 6. Right after graduating from Drake, Gracle Vasquez bought a Chevrolet Camaro Coupe 15S, V8 6.2L, with 426 horsepower, at $31,000 with 10% down and financed the rest with a five-year loan at 6% APR, compounded monthly. What is her monthly payment if she starts the payment one month after the purchase? Also, construct a monthly amortization schedule for your loan for first three months. 7. Minnesota Yikes, a football team under a salary cap problem, has offered Payton Maddening, a free agent QB, a 5-year contract of $1 million dollars a year for the next season with the payments growing at 7% per year for the next 4 years with a signing bonus of $5 million. Another team, Kansas City Cheaps, offered a 5-year contract of $2 million dollars a year for the next season with the payments growing at 8% per year for the next 4 years with a signing bonus of $1.2 million. Payton believes the discount rate for such payments is 15%. Which contract should Payton choose?

Answer 1

4]

a]

APR = monthly rate *12 = 1.45% * 12 = 17.40%

EAR = (1 + (APR / n))ⁿ - 1, where n = number of compounding periods per year. In this case, this is 12, as the rate is compounded monthly.

EAR = (1 + (APR / n))ⁿ - 1

EAR = (1 + (17.40% / 12))¹² - 1

EAR = 18.86%

b]

New APR = daily rate * 365 = 0.0475% * 365 = 17.3375%

The new APR is lower than old APR.

EAR = (1 + (APR / n))ⁿ - 1, where n = number of compounding periods per year. In this case, this is 365, as the rate is compounded daily.

EAR = (1 + (APR / n))ⁿ - 1

EAR = (1 + (17.3375% / 365))³⁶⁵ - 1

EAR = 18.9263%

The new EAR is higher than the old EAR

I do not agree with the credit card company. I am worse off as the new EAR is higher than the old EAR