CHAPTER 6-10

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

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

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.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• 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.

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

• 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.

Dana University of Pennsylvania ‘17, Course Hero Intern

• 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.

Jill Tulane University ‘16, Course Hero Intern