Business, 31.12.2019 03:31 Davidbg23

Suppose that you just purchased a used car worth $12,000 in today’s dollars. assume also that, to finance the purchase, you borrowed $10,000 from a local bank at 9% compounded monthly over two years. assume that the average general inflation will run at 0.5% per month over the next two years.

a) what is the monthly payment charged by the bank? (5)

b) determine the annual inflation-free interest rate for the bank, (5)

c) what equal monthly payments in terms of constant dollars over the next two years, are equivalent to the series of actual payments to be made over the life of the loan

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Answer from: ayoismeisalex

A) Monthly Payment = $457

B) Inflation-free interest rate (month) = 0.2488%, (yearly) = 2.99%

C) Equal monthly payments = $429.75

Explanation:

Requirement A

We know,

Present value of Annuity = PMT × $\frac{1 - (1 + \frac{i}{m})^{-n × m} }{\frac{i}{m} }$

Given,

Present value = $10,000

Number of period, n = 2

Interest, i = 0.09

Monthly compounded, m = 12

Therefore,

$10,000 = PMT × $\frac{1 - (1 + \frac{0.09}{12})^{-2*12} }{\frac{0.09}{12} }$

or, $10,000 = PMT × 21.8891

or, PMT = $457 (rounded to nearest whole number)

Therefore, monthly payment charged by the bank is $457.

Requirement B

We know, Inflation-free interest rate = $\frac{Monthly interest rate - Inflation rate}{1 + Inflation rate}$

Given,

Monthly interest rate = i/m = 0.09/12 = 0.0075

Monthly inflation rate = 0.5% = 0.005

Therefore,

Inflation-free interest rate = $\frac{0.0075 - 0.005}{1 + 0.005}$

Inflation-free interest rate = 0.0024876 or, 0.2488% per month.

Therefore, the annual inflation-free interest rate for the bank = 0.2488% × 12 = 2.99%

Requirement C

We know, equal monthly payments = Borrowed Money × (Actual payment, monthly inflation-free interest rate, number of period)

Given,

Borrowed money = $10,000

Down Payment = $2,000

monthly inflation-free interest rate = 0.2488%

number of period = 24

Equal monthly payments = $10,000 × (Actual Payment, 0.2488%, 24)

But we have to use Present value of annuity formula to find the appropriate monthly payments

$10,000 = PMT × $\frac{1 - (1 + 0.002488)^{-24} }{0.002488}$

or, 10,000 = PMT × 23.2694

or, $429.75

Answer from: Quest

Answer:

the correct answer is economics is a game without winners or losers.

explanation:

unlike sports or games economic is a game without losers or winner rather it is a game where everyone wins. parties of business doing businesses exchange money with each other and hence exchange is done on the basis of goods. one party takes the goods and other sales it so there is winner on both sides. each party values more highly the good it gets than the good it gives up. both sides exchange only because both intend to increase their value. so there is no concept of lose or win.

Answer from: Quest

i just took the test and it is financing

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