1. If you are a lender, and interest is set at 8%, would you rather make...
1. If you are a lender, and interest is set at 8%, would you rather make loans compounded monthly or annually? Why?
B. Suppose that Cougar Autos offers an “easy payment” scheme on a new Honda of $4,000 a year, paid at the end of each of the next four years, with no cash down. What is the car really costing you in today's money? The interest rate is 6%.
|
A. $3,168 |
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B. $13,860 |
||
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C. $15,094 |
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D. $16,000 |
Homework Answers
1) If you are a lender you will always prefer interest rate compounded monthly as against annually, as the effective rate with monthly compounding would be:-
=(1+rate/n)^n1-
=(1+8%/12)^12-1
=8.30%
Whereas in annual compounding it is only 8%
2) Car's present value cost:-
=PV(rate,nper,pmt)
=PV(6%,4,-4000)
=13,860
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