Discuss the effective annual interest rate on the loan


Question 1: Loan Payments. If you take out an $8,000 car loan that calls for 48 monthly payments at an APR of 10 percent, what is your monthly payment? What is the effective annual interest rate on the loan? (Using the excel PMT function)

Question 2: Amortizing Loan. You take out a 30-year $100,000 mortgage loan with an APR of 6 percent and monthly payments. In 12 years you decide to sell your house and pay off the mortgage. What is the principal balance on the loan?

Question 3: Amortizing Loan. Consider a 4-year amortizing loan. You borrow $1,000 initially, and repay it in four equal annual year-end payments.

a. If the interest rate is 8 percent, show that the annual payment is $301.92.

b. Fill in the following table, which shows how much of each payment is interest versus principal repayment (that is, amortization), and the outstanding balance on the loan at each date.

Time    Loan Balance Year-End Interest Due Year-end Amortization of Loan on Balance Payment

0          $1,000      $80     $301.92    $221.92
1            ?????     ?????      301.92      ?????
2            ?????     ?????      301.92      ?????
3            ?????     ?????      301.92      ?????
4              0            0           ??           ??

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Finance Basics: Discuss the effective annual interest rate on the loan
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