Professional Documents
Culture Documents
Differential Interest Problems
Differential Interest Problems
Christine wants to buy a new Lexus. The car she wants has a Manufacturer’s Suggested
Retail Price of $45,000. The dealer has offered to sell Christine the car for $44,000. He
has also offered her 5 years of financing at 5%!! The complete deal is that she puts down
$4,000 then she makes annual interest payments of 5% and at the end of the fifth year
also pays the $40,000. Christine called the bank and they told her that a car loan like this
would normally have an 8% interest rate.
How much is Christine really paying for the Lexus if she takes the Dealer’s Deal?
Go back to the Christine problem. Assume the Dealer Deal was, $44,000, $4,000 down
and the rest in equal annual payments that include interest at 5%.
How much is Christine really paying for the Lexus if she takes the Dealer’s Deal?
Deal #1. Cory’s very fine used cars has offered you the car for $11,000 with the
following terms. $2,000 down and interest only payments of 2% per year for 5 years. At
the end of the five years you send him the $9,000. (He says he is offering you this
special deal because you go to Ohio U and he almost graduated from there!)
Deal #2. Honest Dave has offered you the same car for $9,500 payable with no money
down and the rest in three equal annual payments which include interest at 5%.
Deal #3. Sarah’s Special Deals has offered you the car for $8,200 payable with $200
down and the rest in ten annual equal payments which include interest at 10%. The first
payment, after the down payment, will be due in one year.
Deal #4. Lauren’s Prism Sales has offered you the car for $8,700 cash.
Rank the deals as to their attractiveness to you. Which deal is the best and why?
You are considering buying a note from Fred. It is a $100,000 note originally signed on
January 1, five years ago. The terms were interest only at 8% with a balloon payment of
$100,000 at the end of 10 years. The note has exactly 5 years to maturity. How much
would you pay for the note if you wanted to earn 10%?
Amortize it
Amortize it
Note #2
You are considering buying a note from Nicole. The note was originally for $500,000. It
called for ten equal annual payments which include interest at 8%. There are exactly five
payments left. How much would you pay for the note if you wanted to earn 10%?
Amortize it
Same note – how much would you pay if you wanted to earn 5%?
Amortize it
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