1. The new Cesla electric car sells for $25,000. As a promotion the dealer is providing 0% financing (i.e. 0% interest rate) on a loan over 5 years. What is the annual fixed payment on the loan? Explain, working from fundamentals.
The dealer will sell the car for less than $25,000, if you give them cash now. You don't have any cash but can bormw from the bank at an effective interest rate of 6%.
Find the (threshold) car price, below which you are better off borrowing from the bank and paying the dealer cash? (For this calculate to the nearest 1/10 of a dollar.)
2. Repeat question 1(b)-(c) but with a bond that has 10-years to maturity.
3. Repeat question 2 but assume that the dealer can give you an interest free loan (i.e. 0% instead of 2%). Hint: at least one of the formulas doesn't work, so you'll need to think about this one from first principles.
4. With respect to question 3, suppose you could choose any amortization period. What is the lowest annual fixed payment that you could get on the mortgage?