Question

LOAN AMORTIZATION AND EAR

You want to buy a car, and a local bank will lend you $25,000. The loan will be fully amortized over 5 years (60 months), and the nominal interest rate will be 4% with interest paid monthly.

1. What will be the monthly loan payment? Do not round intermediate steps. Round your answer to the nearest cent.

   $  

2. What will be the loan's EAR? Do not round intermediate steps. Round your answer to two decimal places.

   %

Answer 1

Yearly Nominal Interest rate = 6%

and COmpounded Monthly.

I would be explaining using the calculator, we can do it in Excel as well in short.

Therefore,

4%/12 = 0.0033+1 = 1.0033 and then press "X" and then press "=" 10 times in calculator and then substract 1

You will get 4.033% as EAR - Question B

Annual EMI = 25000/Present Value factor

Present value factor is computed by using calculator 1/1.04033 and then press "=" 5 times and then press "GT"

you will get 4.447 as present value factor.

Therefore, Annual EMI = 25000/4.447 = $5260.83

Therefore, Monthly EMI = Annual EMI /12 = $5260.83/12 = $468.40. - Question A