Question

You want to buy a car, and a local bank will lend you $35,000. The loan will be fully amortized over 5 years (60 months), and the nominal interest rate will be 7% with interest paid monthly. What will be the monthly loan payment? What will be the loan's EAR? Do not round intermediate calculations. Round your answer for the monthly loan payment to the nearest cent and for EAR to two decimal places.

Monthly loan payment: $  

EAR: %

Answer 1

(A)

Loan amount (P)=   35000   

Years =   5  
Total months (n)= 5*12=   60
Interest rate (r)= 7% or    0.07  
Monthly Interest rate (i)= 0.07/12=   0.005833333333  
      
Equal monthly payments formula = P* i *((1+i)^n)/(((1+i)^n)-1)      
=35000*0.00583333333*((1+0.0058333333)^60)/(((1+0.0058333333)^60)-1)      
=693.0419489      
So, equal monthly payment Amount is   $693.04  
      
(B)
Interest rate (r)= 7% or    0.07  
no of compounding in a year (m)=   12  
Effective Annual rate formula = (((1+ (r/m))^m)-1      
=((1+(0.07/12))^12)-1      
=0.07229008086   or 7.23%  

So, EAR of loan is 7.23%      

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