Dreams Do Come True
Imagine that you have decided you need a new car, but not any car will do; you have decided to purchase the car of your dreams. Conduct some research as to the cost of this car. You have determined in this imagined scenario that you could afford to make a 10% down payment. You can borrow the balance either from your local bank using a four-year loan or from the dealership's finance company. If you purchase from your dealership's finance company, the APR will be 10% with your 10% down and monthly payments over three years. However, the dealership will give you a rebate of 5% of the car price after the three year term is complete. You want the best deal possible, so you consider the following questions:
- What type of car have you selected, and what will it cost?
- What is the interest rate from your local bank for a car loan for four years?
- What will your payment be to your local bank, assuming your 10% down payment? Be sure to use the formula and show your work. How much will that car have cost in four years?
- What will your payment be to the dealership finance company assuming your 10% down payment? Be sure to use the formula provided in Chapter 4 and show your work. How much will that car have cost in 3 years?
- Which is the better deal and why?
Present and Future Values, and Expected Returns
Go to the Yahoo Finance Bonds Center.
- Under: Bonds Center click Bond Screener:
- Click the Corporate check box under Bond Type then click Find Bonds.
- Choose any bond.
Assume interest rates for bonds today is 5% for an AAA rated bond. Calculate the price of the bond you have selected relative to the 5%. Is the bond selling at a premium or a discount? Why? Be sure to show how you arrived at your answer. What other factors may influence the value of a bond?