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

Info icon This 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) 10 ] / .0511} = $53,776.72 Note, this is the value one period (six months) before the first payment, so it is the value at year 8. So, the value at the various times the questions asked for uses this value 8 years from now.
Image of page 1
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern