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Unformatted text preview: 69LOAN AMORTIZATION AND EFFECTIVE INTEREST RATEYou are thinking about buying a car, and a local bank is willing to lend you $20,000 to buy the car. Under the terms of the loan, it will be fully amortized over 5 years (60 months), and the nominal rate of interest will be 12 percent, with interest paid monthly. WHAT WOULD BE THE MONTHLY PAYMENT ON THE LOAN? WHAT WOULD BE THE EFFECTIVE RATE OF INTEREST ON THE LOAN?Using a financial calculator, enter the following:N=60I=1PV=20000andFV=Solve for PMT= $444.89.(29%.68.12.101.1.1112==+=mNommiEAR610GROWTH RATESShalit Corporation’s 2002 sales were $12 million. Sales were $6 million 5 years earlier (in 1997).(a.)To the nearest percentage point, at what rate have sales been growing?(b.)Suppose someone calculated the sales growth for Shalit Corporation in part (a) as follows: “Sales doubled in 5 years. This represents a growth of 100 percent in 5 years, so, dividing 100 percent by 5, we find the growth rate to be 20 percent per year.” Explain what is wrong with this calculation.(a.)1997 ?19981999200020012002612 (in millions)With a calculator, enter:N=5PV=6PMT=FV=12Solve for I = 14.87%.(b.)The calculation described in the quotation fails to take account of the compounding effect. It can be demonstrated to be incorrect as follows:$6,000,000(1.20)5= $6,000,000(2.4883) = $14,929,800,which is greater than $12 million. Thus, the annual growth rate is less than 20 percent; in fact, it is about 15 percent, as shown in Part (a).611EXPECTED RATE OF RETURNWashingtonAtlantic invests $4 million to clear a tract of land and to set out some young pine trees. The trees will mature in 10 years, at which time WashingtonAtlantic plans to sell the forest at an expected price of $8 million. forest at an expected price of $8 million....
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This note was uploaded on 04/15/2008 for the course FIN 321 taught by Professor Kelley during the Spring '08 term at Loyola Maryland.
 Spring '08
 Kelley
 Finance, Effective Interest Rate, Interest, Interest Rate

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