Your friends are going to Puerto Vallarta, Mexico, over Reading Week and you want to go too. Unfortunately, you haven't been good at saving, so you need to borrow $2400 to pay for the trip. You can finance the trip on your credit card at a rate of 23% APR with daily compounding. Alternatively, your parents (who are both bankers) are willing to lend you the money at a rate of 11% per six months compounded every six months. a. What is the EAR of borrowing with your credit card? (Assume 365 days in a year.) b. What is the EAR of borrowing from your parents? c. If you plan to repay the $2400 in equal monthly instalments, what would be the rates to use in the following annuity formulas to calculate your monthly payments. i. Assume you borrowed with the credit card. ii. Assume you borrowed from your parents. 1 PV(annuity of C for n periods with interest rate r) = Cx- or PV(growing perpetuity) = r-g 1- (1 + r)n ( ..... a. EAR = (Round to six decimal places.)
Your friends are going to Puerto Vallarta, Mexico, over Reading Week and you want to go too. Unfortunately, you haven't been good at saving, so you need to borrow $2400 to pay for the trip. You can finance the trip on your credit card at a rate of 23% APR with daily compounding. Alternatively, your parents (who are both bankers) are willing to lend you the money at a rate of 11% per six months compounded every six months. a. What is the EAR of borrowing with your credit card? (Assume 365 days in a year.) b. What is the EAR of borrowing from your parents? c. If you plan to repay the $2400 in equal monthly instalments, what would be the rates to use in the following annuity formulas to calculate your monthly payments. i. Assume you borrowed with the credit card. ii. Assume you borrowed from your parents. 1 PV(annuity of C for n periods with interest rate r) = Cx- or PV(growing perpetuity) = r-g 1- (1 + r)n ( ..... a. EAR = (Round to six decimal places.)
Excel Applications for Accounting Principles
4th Edition
ISBN:9781111581565
Author:Gaylord N. Smith
Publisher:Gaylord N. Smith
Chapter27: Time Value Of Money (compound)
Section: Chapter Questions
Problem 6E
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Transcribed Image Text:Your friends are going to Puerto Vallarta, Mexico, over Reading Week and you want to go too. Unfortunately, you haven't been good at saving, so you need to borrow
$2400 to pay for the trip. You can finance the trip on your credit card at a rate of 23% APR with daily compounding. Alternatively, your parents (who are both bankers)
are willing to lend you the money at a rate of 11% per six months compounded every six months.
a. What is the EAR of borrowing with your credit card? (Assume 365 days in a year.)
b. What is the EAR of borrowing from your parents?
c. If you plan to repay the $2400 in equal monthly instalments, what would be the rates to use in the following annuity formulas to calculate your monthly payments.
i. Assume you borrowed with the credit card.
ii. Assume you borrowed from your parents.
1
C
PV(annuity of C for n periods with interest rate r) = Cx
(1 + r)n
or PV(growing perpetuity) =
r-g
a. EAR =
(Round to six decimal places.)
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