Question

Hull wants to borrow a car. After making a cash payment for tax, title, and a down payment, he will finance $32, 445. The interest rate is ½% per month and payments will be required for 5 years. a) How much will Hull’s monthly payment be? b) What is the effective annual rate of interest?

Answer 1

a)

EMI = [P x R x (1+R)^N]/[(1+R)^N-1]

Where,

EMI= Equal Monthly Payment

P= Loan Amount

R= Interest rate per period

N= Number of periods =12*5 =60

= [ $32445x0.005 x (1+0.005)^60]/[(1+0.005)^60 -1]

= [ $162.225( 1.005 )^60] / [(1.005 )^60 -1

=$627.25

b)

Effective rate of interest = (1+r)^n -1
n= number of periods
r = interest rate
= (1+0.005) ^12 - 1
=6.17%