Chapter 5, Solutions Cornett, Adair, and Nofsinger

The loan balance is the principal amount outstanding. The duration of remaining payments is 24, the interest rate is 8% annual and the monthly payment is $366.19 from the previous calculation. Use these values to calculate the present value of the loan using equation 5-4:

This is the minimum price the car needs to be sold for and it represents her break even price.

LG95-48 Loan Balance Hank purchased a $20,000 car two years ago using an 9 percent, 5-year loan. He has decided that he would sell the car now, if he could get a price that would pay off the balance of his loan. What’s the minimum price Hank would need to receive for his car?

First calculate the monthly payment that he has been paying using equation 5-9:

The loan balance is the principal amount outstanding. The duration of remaining payments is 36, the interest rate is 9% annual and the monthly payment is $415.17 from the previous calculation. Use these values to calculate the present value of the loan using equation 5-4:

This is the minimum price the car needs to be sold for and it represents his break even price.

LG95-49 Teaser Rate Mortgage A mortgage broker is offering a $183,900 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 4 percent APR interest rate. After the second year, the mortgage interest rate charged increases to 7 percent APR. What are the monthly payments in the first two years? What are the monthly payments after the second year?

Use equation 5-9 to calculate the payment using the teaser rate: