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Natali5045456 [20]
3 years ago
15

You want to buy a car, and a local bank will lend you $20,000. The loan will be fully amortized over 5 years (60 months), and th

e nominal interest rate will be 10% with interest paid monthly.
1. What will be the monthly loan payment?

2. What will be the loan's EAR?
Business
1 answer:
EastWind [94]3 years ago
7 0
Amortizing a loan P over n periods at i% interest / period, the payment per period is given by:
A= P(i(1+i)^n)/((1+i)^n-1)

In given situation,
P=20000
period=month
i=10%/12
n=5*12=60 months

A.  monthly payment amount
A= P(i(1+i)^n)/((1+i)^n-1)
= 20000(.1/12(1+.1/12)^60)/((1+.1/12)^60-1)
=424.98 to the nearest cent

B. EAR (effective annual rate)
the APR is 10%, but compounded monthly.
So 
EAR=(1+i/12)^12-1
=(1+0.1/12)^12-1
=0.104713
=10.4713%  (effective annual rate)

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