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Chapter 4: Q 1. (page 135)

Go to the St. Louis Federal Reserve FRED database, and find data on the interest rate on a four-year auto loan (TERMCBAUTO48NS). Assume that you borrow \(20,000 to purchase a new automobile and that you finance it with a four-year loan at the most recent interest rate given in the database. If you make one payment per year for four years, what will the yearly payment be? What is the total amount that will be paid out on the \)20,000 loan?

Short Answer

Expert verified

Yearly payment - $5,878.03.

Total payment - $23,512.12

Step by step solution

01

Step 1. Introduction

The interest rate is an amount charged by the lender on borrowings. It also refers to the amount paid to depositors on deposits. In the given case, the interest rate refers to the amount charged on borrowing an auto loan.

02

Step 2. Explanation

$5,878.03脳4=$23,512.12The interest rate on four-year auto loan for is 4.58% for November 2021.

The yearly payment can be obtained as,

$20,000=FP脳11+0.0458+1(1+0.0458)2+1(1+0.0458)3+1(1+0.0458)4$20,000=FP脳0.9562+0.9144+0.6959+0.8360$20,000=FP脳3.4025FP=20,0003.4025=5,878.03

The total payment for the perio of four years can be obtained as,

$5,878.03脳4=$23,512.12

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Most popular questions from this chapter

What is the yield to maturity on a \(10,000-face-value discount bond, maturing in one year, which sells for \)9,523.81?

Assume you just deposited \(1,250 into a bank account. The current real interest rate is 1%, and the expected rate of inflation over the next year is 5%. What nominal interest rate should the bank charge you over the next year? How much money will you have at the end of one year? If you are saving to buy a motorbike that currently sells for \)1,300, will you have enough money to buy it?

What is the formula used to calculate the yield to maturity on a 20-year coupon bond with a current yield of 12% and \(1,000 face value that sells for \)2,500

The U.S. Treasury issues some bonds as Treasury Inflation Indexed Securities, or TIIS, which are bonds adjusted for inflation; hence the yields can be roughly interpreted as real interest rates. Go to the St. Louis Federal Reserve FRED database, and find data on the following TIIS bonds and their nominal counterparts. Then answer the questions below.

  • 5-year U.S. Treasury (DGS5) and 5-year TIIS (DFII5)
  • 7-year U.S. Treasury (DGS7) and 7-year TIIS (DFII7)
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c. Based on your answer to part (b), are there significant variations among the differences in the bond-pair yields? Interpret the magnitude of the variation in differences among the pairs.

Consider a coupon bond that has a \(900 par value and a coupon rate of 6%. The bond is currently selling for \)860.15 and has two years to maturity. What is the bond鈥檚 yield to maturity?
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