Question

Answer questions A-D

Question A

A local rent to own company has a 55" TV special where you can own a new TV (worth $1,600) by making payments of only $150 per month for 24 months. What is the EFFECTIVE rate of interest that you would be paying if you decided to agree to make the 24 monthly payments?

Question B

You are getting ready to buy a car. After looking at your budget, you can afford monthly car payments of $250 per month. The current 5 year auto loan has an APR of 3%. If you have no money for a down payment, what is the maximum loan that can you afford?

Question C

Your credit card has an EFFECTIVE rate of 28%. You can pay off your credit card debt in 8 months by paying $500 each month. What is the current balance on your credit card?

Question D

You would like to setup a trust fund for your two children to ensure that they will be taken care of in the future. At the end of this year, you would like each of your children to receive $25,000 (2 x $25,000= $50,000 payment received at the end of the year), and you would like to have this amount grow at the rate of inflation, (which will be assumed to be 3% forever) How much do you need to have in the trust fund if you are able to receive 4% return on your investment indefinitely?

Answer 1

	Question A
	Present Value of TV	$1,600
	Monthly payment	$150
	Number of months	24
	Effective monthly interest	7.84%	(Using Rate Function of excel with Nper=24, Pmt=150, PV=-1600)
	QUESTION B
	Number of months	60
	Monthly interest=3/12=0.25%	0.25%
	Monthly paym,ent	$250
	Maximum loan can be afforded	$13,913.09	(Using PV Function of excel with Rate=0.25%, Nper=60, Pmt=-250, )
	QUESTION C
	Effective monthly rate=28/12=	2.33%	2.333333333
	Number of months	8
	Monthly payment	$500	(Using PV Function of excel with Rate=0.23333%, Nper=8, Pmt=-500, )
	Loan Balance=PV of payments	$3,958.32
	QUESTION D
	Amount needed at the end of year1	$50,000
	Geowth rate of annual amount=3%	0.03	(Inflation)
	Return on investmment=4%	0.04
	Investment Needed	$        5,000,000	(50000/(0.04-0.03))