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Doug wishes to take out a loan for £2,000. He has the choice of two loans:
Loan l: monthly payments for 36 months at an APR of 9·38%
Loan 2: monthly payments for 24 months at an APR of 12·68%Required:
Calculate the monthly repayments for loans 1 and 2 to two decimal places.Sir need your help . my Question is if APR is given should we use 9.38% divide by 12 ? 9.38/12= 0.781667
or first we’ll take monthly base rate like 1.0938^(1/12) -1= 0.0075 *100 = 0.75%
2000(1+0.0075)^36 =2617.29
but its in correct can you explain why ?For Loan 1, you calculate the monthly rate as 1.0938^(1/12) which gives a rate of 0.75% per month.
However it should be obvious that the answer you have of 2,617.29 cannot possibly be correct. The question is asking what the monthly payment will be when they borrow 2,000. They are not going to be repaying 2,617.29 per month 🙂
The PV of the repayments will be equal to the amount borrowed of $2,000.
So the payment per month will be 2,000 divided by the annuity discount factor for 26 periods at 0.75% per period.
Since the annuity tables neither have a row for 36 periods or a column for 0.75%, you need to calculate the discount factor yourself using the formula given on the tables.Have you watched my free lectures on interest and on investment appraisal?
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