Reference no: EM131104016
Imagine that you have just landed your first job since completing your education and are considering the purchase of a new automobile. The auto has a cost of £15,000. You have contacted three different banks to inquire about obtaining a loan. Each has agreed to finance the full purchase price of the auto with a 4-year loan at 6% (APR). However, the loans vary with regard to type and how interest is compounded. The first bank, Bank A, offers an amortising loan that compounds interest on a monthly basis with payments being made on a monthly basis. The second bank, Bank B, offers an amortising loan that compounds interest on a quarterly basis with payment being made on a quarterly basis. The third bank, Bank C, offers a non-amortising loan that compounds interest on a daily basis with interest payments being made on a yearly basis. With the information you have answer the following questions:
1. What are the amounts of the required payments from each type of loan? (You need to show what the periodic interest rate is for each loan and the full equation used to compute the required payment). Assume that a year is 365 days, and present your result with two decimals.
2. For each loan, what is the total amount of interest that would have to be paid at the end of loan?
3. What is the EAR for each loan?
4. For each loan, provide the cash flows for each period, showing the required payment, amount of interest paid, amount of principal paid and the remaining principal balance. You are required to complete this using Excel.
5. You have a friend that has been helping with the purchase of the auto, but does not understand why the loans are producing different results. Provide an explanation to your friend that outlines why the payment differ, why the total amount of interest paid differs and why the EAR of each loan differs from the stated APR.
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