ECN 5600_Chapter03 - Quoted interest rate 8% 6% Initial...

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Unformatted text preview: Quoted interest rate 8% 6% Initial charges 0% 4% 100.00 104.17 #NAME? Date Cash flow Cash flow Date 1, get loan 100.00 100.00 Date 2, pay it back-108.00-110.42 #NAME? 8.00% 10.42% #NAME? CHEAPER LOAN: WEST HAMPTON OR EAST HAMPTON? West Hampton East Hampton Amount borrowed to get $100 today Effective annual interest rate, EAIR A B C D 1 2 3 4 5 6 7 8 9 10 Loan balance outstanding at the end of each month Month 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 $1,000.00 $1,012.00 #NAME? $1,024.14 #NAME? $1,036.43 #NAME? $1,048.87 #NAME? $1,061.46 #NAME? $1,074.19 #NAME? Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 $1,087.09 #NAME? $1,100.13 #NAME? $1,113.33 #NAME? $1,126.69 #NAME? $1,140.21 #NAME? $1,153.89 #NAME? HOW LOAN SHARK CHARGES: 14.4% PER YEAR ON A MONTHLY BASIS = 1.2% PER MONTH A B C D E F G H 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 THE BANK OR LOAN SHARK? Bank Loan Shark Quoted interest rate 15.0% 14.4% Borrow today 1,000.00 1,000.00 Repay in one year-1,150.00-1,153.89 #NAME? 15.00% 15.39% #NAME? Monthly interest rate 1.20% #NAME? 15.39% #NAME? Effective annual interest rate, EAIR A second way to compute the EAIR EAIR Annualized monthly rate A B C D 1 2 3 4 5 6 7 8 9 10 FINANCING THE JUNKMOBILE Year Pay cash-1,700 1,700 #NAME? 1-2,000-2,000 #NAME? 17.65% #NAME? Year 1,700 1-1,870 10.00% #NAME? Dealer's "0% financing" Differential cash flow Effective annual interest rate (EAIR) charged by dealer Borrow from Uncle Frank Effective annual interest rate (EAIR) charged by Uncle Frank A B C D E 1 2 3 4 5 6 7 8 9 10 11 12 A SIMPLE MORTGAGE Mortgage principal 100,000 Interest rate 8% Mortgage term (years) 10 Annual payment $14,902.95 #NAME? Year 100,000.00 1-14,902.95 #NAME? 2-14,902.95 3-14,902.95 4-14,902.95 5-14,902.95 6-14,902.95 7-14,902.95 8-14,902.95 9-14,902.95 10-14,902.95 8.00% #NAME? Mortgage cash flow Effective annual interest rate (EAIR) A B C 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 A MORTGAGE WITH POINTS Mortgage principal 100,000 "Points" 1.50% Quoted interest 8.00% Mortgage term (years) 10 Annual payment $14,902.95 #NAME? Year 98,500.00 #NAME? 1-14,902.95 #NAME? 2-14,902.95 3-14,902.95 4-14,902.95 5-14,902.95 6-14,902.95 7-14,902.95 8-14,902.95 9-14,902.95 10-14,902.95 8.34% #NAME? MORTGAGE AMORTIZATION TABLE Year 1 98,500.00 $14,902.95 $8,211.41 6,691.54 #NAME? 2 91,808.46 $14,902.95 $7,653.58 7,249.37 3 84,559.09 $14,902.95 $7,049.23 7,853.71 4 76,705.38 $14,902.95 $6,394.51 8,508.44 5 68,196.94 $14,902.95 $5,685.21 9,217.74 6 58,979.20 $14,902.95 $4,916.78 9,986.17 7 48,993.03 $14,902.95 $4,084.28 10,818.66 8 38,174.37 $14,902.95 $3,182.39 11,720.56 9 26,453.81 $14,902.95 $2,205.31 12,697.64 10 13,756.17 $14,902.95 $1,146.78 13,756.17 #NAME? #NAME?...
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ECN 5600_Chapter03 - Quoted interest rate 8% 6% Initial...

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