What is the actual interest rate the dealership is charging

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Reference no: EM132820953

You are considering purchasing a vehicle. You can buy it at the local dealership which will finance the purchase, or you can purchase it on Craigslist, but you have to pay cash for it. The local dealer has offered you the following "special deal."

Face value 20,000
Coupon rate 1.0%
Market rate ???
Term of note 5

You can buy it on Craigslist for the following.

Fair value of the vehicle   16,000

Problem 1: Assuming equal annual payments of principal and interest, what is the actual interest rate the dealership is charging?

Problem 2: Assuming the note is due at maturity and interest is due annually, what is the actual interest rate the dealership is charging?

Reference no: EM132820953

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