Question

Moulton motors is advertising the following deal on a new Honda civic: Monthly payments of $709.88 for the next 36 months and this beauty can be yours!" the sticker price of the car is $22,000. if you bought the car, what interest rate would you be paying in both APR and EAR terms? what is the amortization schedule of the first six payments?

Answer 1

Case 1

Step 1 - Calculating APR

APR will be calculated using Present Value of Annuity

Present Value of Annuity =

We have values:

Present Value of Annuity = $22,000

C = $709.88

t=36 months or 36

r=APR or x (to be find out)

Putting these values in formula:

22,000 = = 0.10

Thus, APR = 10.00%

Step 2 - Calculating EPR

EPR = - 1

r=APR or 10.00% or 0.10

m=compounding frequency = monthly or 12

EPR = - 1 = 0.1047

Thus, EPR will be 10.47%

Case 2

Amortization schedule of the first six payments

Month	Principal Outstanding	Total Payment	Interest Paid	Principal Paid	Ending Balance
1	22,000.00	709.88	183.33	526.55	21,473.45
2	21,473.45	709.88	178.95	530.93	20,942.52
3	20,942.52	709.88	174.52	535.36	20,407.16
4	20,407.16	709.88	170.06	539.82	19,867.34
5	19,867.34	709.88	165.56	544.32	19,323.02
6	19,323.02	709.88	161.03	548.85	18,774.17

Interest Paid = Principal Outstanding x (APR/12)

Principal Paid = Total Payment - Interest Paid

Ending Balance = Principal Outstanding - Principal Paid