CHAPTER 6-10 - in the problem is only relevant to determine...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
in the problem is only relevant to determine the total interest under the terms given. The interest rate for the cash flows of the loan is: PVA = $25,000 = $2,416.67{(1 – [1 / (1 + r )] 12 ) / r } Again, we cannot solve this equation for r , so we need to solve this equation on a financial calculator, using a spreadsheet, or by trial and error. Using a spreadsheet, we find: r = 2.361% per month So the APR is: APR = 12(2.361%) = 28.33% And the EAR is: EAR = (1.02361) 12 – 1 = .3231 or 32.31% 52. The cash flows in this problem are semiannual, so we need the effective semiannual rate. The interest rate given is the APR, so the monthly interest rate is: Monthly rate = .10 / 12 = .00833 To get the semiannual interest rate, we can use the EAR equation, but instead of using 12 months as the exponent, we will use 6 months. The effective semiannual rate is: Semiannual rate = (1.00833) 6 – 1 = .0511 or 5.11% We can now use this rate to find the PV of the annuity. The PV of the annuity is: PVA @ year 8: $7,000{[1 – (1 / 1.0511)
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.
Ask a homework question - tutors are online