Lecture 3- Solutions EAR and APR problems

Lecture 3- Solutions EAR and APR problems - (1+.08/12) 12 -...

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Lec ture 3- Ch.4, Solutions to EAR and APR problems 1. What is the EAR on a 9% APR automobile loan that has monthly payments? A) 9.00% B) 9.38% C) 9.81% D) 10.94% EAR = ( 1 + APR/m) m -1 Or EAR = (1 + i m ) m -1 EAR = (1+.09/12) 12 -1 = 9.3807%=9.38% (rounded). 2. Which account would be preferred by a depositor: an 8% APR with monthly compounding or an 8.2% APR with semi-annual compounding? A) 8% with monthly compounding B) 8.2% with semi-annual compounding C) The depositor would be indifferent D) The time period must be known in order to select the preferred account EAR + ( 1 + APR/m) m -1 The EAR corresponding to an 8% APR with monthly compounding =
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Unformatted text preview: (1+.08/12) 12 - 1 = 8.3% (rounded). The EAR corresponding to an 8.2% APR with semi-annual compounding = (1+.082/2) 2-1 = 8.3681%. So the depositor will prefer an account offering an 8.2% APR with semi-annual compounding since its EAR is higher. 3. If the EAR is known to be 16.08% on a debt that has quarterly payments, what is the APR on the debt? A) 14.02% B) 14.82% C) 15.20% D) 15.60% APR/m (or i m ) = (1 + EAR) 1/m-1 The quarterly interest rate = (1.1608) 1/4-1 = 3.80% (rounded). APR = i m x m So the APR = 0.038 4 = 15.20%....
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