Question

You want to buy a new sports coupe for $84,600, and the finance office at the dealership has quoted you a 7.1 percent APR loan for 48 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?

Group of answer choices

• $2,017.84; 7.24 percent

• $2,017.84; 7.29 percent

• $2,017.84; 7.34 percent

• $2,029.78; 7.29 percent

• $2,029.78; 7.34 percent

Answer 1

Information provided:

Present value= $84,600

Time= 48 months

Interest rate= 7.1%/12= 0.5917% per month

The monthly payment is computed by entering the below in a financial calculator:

PV= -84,600

N= 48

I/Y= 0.5917

Press the CPT key and PMT to compute the monthly payment.

The value obtained is 2,029.78

Therefore, the monthly payment is $2,029.78.

Effective annual rate is calculated using the below formula:

EAR= (1+r/n)^n - 1

Where r is the interest rate and n is the number of compounding periods in one year.

EAR= (1+0.071/12)^12-1

        = 1.0734-1

        = 0.0734*100

= 7.34%

Therefore, the effective annual rate is 7.34%.

Hence,  the answer is option e.