Question 1

The Corner Bakery needs $86,000 today for remodeling.They have obtained a 2-year, pure-discount loan at an interest rate of 6.8 percent, compounded annually.How much must they repay in two years?

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Question 2

Today, you are borrowing $18,200 to purchase a car.What will be your monthly payment if the loan is for three years at 7.0 percent interest?

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Question 3

Julie is borrowing $14,950 to purchase a car.The loan terms are 48 months at 6.95 percent interest, compounded monthly.How much interest, rounded to the nearest dollar, will she pay on this loan if she pays the loan as agreed?

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Question 4

You have an outstanding loan with an EAR of 14.61 percent.What is the APR if interest is compounded monthly?

Accepted Answer

The APR can be calculated using the formula: APR = m * [(1 + EAR)^(1/m) - 1], where m is the number of compounding periods per year. For monthly compounding, m = 12. Plugging in the values, APR = 12 * [(1 + 0.1461)^(1/12) - 1] = 13.71 percent.

Question 5

Your aunt loaned you money at 1.00 percent interest per month.What is the APR of this loan?

Accepted Answer

The APR (Annual Percentage Rate) is calculated by multiplying the monthly interest rate by 12. Therefore, 1.00 percent per month multiplied by 12 months equals 12.00 percent APR.

Question 6

The Egg House just borrowed $660,000 to build a new restaurant.The loan terms call for equal annual payments at the end of each year.The loan is for 15 years at an APR of 8.35 percent.How much of the first annual payment will be used to reduce the principal balance?

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Question 7

What effective annual rate can a bank earn on an APR of 10.5 percent, compounded monthly?

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Question 8

E-Z Loans is offering a special on one-year loans.The company will loan you $1,500 today with no waiting and no credit check, in exchange for one payment of $2,000 one year from now.What is the APR on this loan?

Accepted Answer

The APR (Annual Percentage Rate) is calculated as the interest paid divided by the principal, then multiplied by 100 to convert it to a percentage. Here, the interest is $500 ($2,000 - $1,500), and the principal is $1,500. So, APR = ($500 / $1,500) * 100 = 33.33 percent.

Question 9

Best's Fried Chicken just took out an interest-only loan of $50,000 for three years with an interest rate of 8.15 percent.Payments are to be made at the end of each year.What is the amount of the payment that will be due at the end of Year 3?

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Question 10

Sporting Goods charges .85 percent interest per month.What rate of interest are its credit customers actually paying?

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Question 11

What is the effective annual rate of 14.9 percent compounded quarterly?

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Question 12

The Rent-to-Own Store has a six-year, interest-only loan at 7.6 percent interest.The firm originally borrowed $115,000.How much will the firm pay in total interest over the life of the loan?

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Question 13

An amortized, 3-year loan has annual payments and an effective annual rate of 14.56 percent.What is the APR?

Accepted Answer

The APR is the same as the effective annual rate when the loan has annual payments, so it is 14.56 percent.

Question 14

Hometown Builders is borrowing $195,000 today for four years.The loan is an interest-only loan with an APR of 7.65 percent.Payments are to be made annually.What is the amount of the first annual payment?

Accepted Answer

For an interest-only loan, the annual payment is simply the interest on the principal. The interest for the first year is calculated as $195,000 * 7.65% = $14,917.50.

Question 15

Today, you are borrowing money and must repay the lender one year from now with a lump-sum payment of $12,800.How much money are you borrowing if the interest rate is 8.45 percent, compounded monthly?

Accepted Answer

To find the present value (amount borrowed), use the formula for compound interest: PV = FV / (1 + r/n)^(nt). Here, FV = $12,800, r = 0.0845, n = 12, t = 1. Calculating gives PV ≈ $11,766.32.

Question 16

Sheet Metals has an outstanding loan that calls for equal annual payments of $12,600.47 over the life of the loan.The original loan amount was $72,000 at an APR of 8.15 percent.How much of the third loan payment is interest?

Accepted Answer

The correct answer is B.The interest portion of the third loan payment can be calculated using the formula:Interest = Loan amount * APR * (1 - (1 + APR)^(-n)) / APRwhere:Loan amount = $72,000APR = 8.15%n = 3 (since this is the third payment)Plugging these values into the formula, we get:Interest = $72,000 * 0.0815 * (1 - (1 + 0.0815)^(-3)) / 0.0815= $4,725.89Therefore, the interest portion of the third loan payment is $4,725.89.

Question 17

A loan that compounds interest monthly has an EAR of 14.40 percent.What is the APR?

Accepted Answer

The APR is the EAR divided by the number of compounding periods per year. In this case, the EAR is 14.40 percent and the number of compounding periods per year is 12, so the APR is 14.40 percent / 12 = 1.20 percent per month. This is equivalent to an APR of 13.59 percent per year.

Question 18

Dixie's Markets offers credit to its customers and charges interest of 1.2 percent per month.What is the effective annual rate?

Accepted Answer

The effective annual rate is 1.012^12 - 1 = 15.39%.

Question 19

Walker's charges a daily rate of .049 percent on its store credit cards.What interest rate is the company required by law to report to potential customers? Assume each quarter has exactly 91.25 days.

Accepted Answer

The company is required to report the annual percentage rate (APR). The daily rate is 0.049%, so the annual rate is 0.049% * 365 = 17.885%, which rounds to 17.89%.

Question 20

Jeffries & Sons is borrowing $95,000 for four years at an APR of 7.05 percent.The principal is to be repaid in equal annual payments over the life of the loan with interest paid annually.Payments will be made at the end of each year.What is the total payment due for Year 3 of this loan?

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Quiz 5: Discounted Cash Flow Valuation