Sie sind auf Seite 1von 10

OUTLINE OF THE REPORT

What is Installment financing? Other terms associated with installment financing and its definition Presentation and discussion of examples and solutions

Installment Financing is defined as

financing arrangements for purchasing merchandise or loan


Example: Purchase of a car payable in certain period plus charges and interest

Other Terms associated with Installment Financing


Charges These are charges often paid by the borrower on the basis of what amount is owed at the beginning of the loan.
Example: Purchase of car worth 300,000 payable in 12 months at 2% interest.
Interest/Finance

Example 5-14 Computation of Effective Interest Rate


In 1915, Albert Epstein allegedly borrowed $7,000 from a large new York bank on the condition that he would repay 7% of the loan every 3 months, until a total 50 payments had been made. At the time of the 50th payment, the $7,000 loan would be completely repaid. a. What true effective annual interest rate did Albert pay? b. What, if anything, was wrong with his calculation?

Based on Einsteins computation:


Albert

computed his annual interest rate to be [0.07(7,000) x 4]/7,000 = 0.28 (28%) He computed interest rate per quarter then he divided the resulting rate, and multiply it with the value of the loan as presented below:
[490 x 4] / 7,000 which resulted to 28%

Computation of true interest rate


The true interest rate per quarter is found by equating the equivalent value of the amount borrowed to the equivalent value of the amounts repaid. Equating the AW amounts per quarter, we find:
$7,000(A/P, i %/quarter,50 quarters) = 0.07($7,000) per quarter, (A/P, i%,50) = 0.07

By Linear Interpolation

To find i% / quarter by using similar triangles: ( A/P, 6%, 50) = 0.0634 ( A/P, 7%. 50) = 0.0725 (See Figure 1.) 7% - i%/ 7% - 6% = 0.0725 0.07 / 0.0725 0.0634 i % = 7% - 1%(0.0025/0.0091)

= 6.73% per quarter

0.0725 e 0.07 i 0.0634

C d B
7% Line de Line BA = Line Cd Line CB

A
6%

Figure 1

By the use of Excel financial function RATE function which is represented by: Nper or the total number of payment period for the purchase of merchandise or loan

Pmt or the payment made each period, and Pv the total value/total amount

Das könnte Ihnen auch gefallen