Week 2 Discussion– BUS
Question One
Simple interest aids in the calculation of accrued charges on a given loan. According to Brealey, Myers & Marcus (2012), this is an easy and quick method that helps investors know the fees they have to pay after borrowing money. The formula for calculating simple interest is P*1*N whereby P is the principle, I is the interest rate and N represents the number of days. This formula mostly applies to short-term loans but some mortgages incorporate it. Compound interest refers to the calculations done on the initial principal borrowed and adding them to the interests calculated on previous loans. The formula for calculating compound interest is P (1 + r/n) ^ (nt) where P is principal balance, R is the interest rate, N is interest compounded (previous & current) and T is time to repay initial principal.
Question Two
If other things remain unchanged, future value affects the discounted present value by helping investors know the interest rate to be earned after a certain period. Ordinary annuity affects the discounted present value by calculating the interest earned after making equal cash payments to service a loan. Compounding periods affect discounted present value by calculating the profits to be accrued after an investment. The rate of return affects the discounted present value by helping investors know the amount to pay monthly, semi-annually, or yearly based on terms and conditions.
Question Three
Monthly rate of annuity formula
$80,000= $600*[1/r – 1/ r* (1+r) 240
Whereby
PV is $80,000
N is 20 years by 12 months/yr= 240 months
FV (Future value) = 0
PM (Pay per month)= $600
Using a financial calculator and entering these values, the monthly rate is 0.548%.
The effective annual rate is a nominal monthly rate* number of months (n).
Thus 0.548*12= 6.576%
Question Four
APR=12%
Initial payment= $2000
Monthly payment= $400
$2000+ [400 [1-1/ 12 48]*12]
$2000+ [400 [1-1.58]*12]
$2000+ [400 [0.58]*12]
$2000+ [400 [6.96]
$2000+ 2784
Therefore, the maximum price to pay for the car is $4784. 00
Reference
Brealey, R. A., Myers, S. C., & Marcus, A. J. (2012). Fundamentals of corporate finance. McGraw-Hill/Irwin.