Effective rate of return

1. Assume you graduate from university with a $30,000 student loan. If your interest rate is fixed at 4.66% APR with monthly compounding and you will repay the loan over a 10-year period, what will be your monthly payment?

2. You have an outstanding student loan with required payments of $500 per month for the next four years. The interest rate on the loan is 9% APR (monthly). You are considering making an extra payment of $100 today (i.e., you will pay an extra $100 that you are not required to pay). If you are required to continue to make payments of $500 per month until the loan is paid off, what is the amount of your final payment? What effective rate of return (expressed as an APR with monthly compounding) have you earned on the $100?

Consider the loan from the previous question: a 60-month, $50,000 car loan with a 6% APR, compounded monthly. Assume that right after you make your 50th payment, the balance on the loan is $9405.81. How much of your next payment goes toward principal and how much goes toward interest? Compare this with your answers in the last question—what is happening?

Solution:

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