Your friends are going to Puerto Vallarta, Mexico, over Reading Week and you want to go too. Unfortunately, you haven't been good at saving, so you need to borrow $2400 to pay for the trip. You can finance the trip on your credit card at a rate of 23% APR with daily compounding. Alternatively, your parents (who are both bankers) are willing to lend you the money at a rate of 11% per six months compounded every six months. a. What is the EAR of borrowing with your credit card? (Assume 365 days in a year.) b. What is the EAR of borrowing from your parents? c. If you plan to repay the $2400 in equal monthly instalments, what would be the rates to use in the following annuity formulas to calculate your monthly payments. i. Assume you borrowed with the credit card. ii. Assume you borrowed from your parents. 1 PV(annuity of C for n periods with interest rate r) = Cx- or PV(growing perpetuity) = r-g 1- (1 + r)n ( ..... a. EAR = (Round to six decimal places.)

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question
Your friends are going to Puerto Vallarta, Mexico, over Reading Week and you want to go too. Unfortunately, you haven't been good at saving, so you need to borrow
$2400 to pay for the trip. You can finance the trip on your credit card at a rate of 23% APR with daily compounding. Alternatively, your parents (who are both bankers)
are willing to lend you the money at a rate of 11% per six months compounded every six months.
a. What is the EAR of borrowing with your credit card? (Assume 365 days in a year.)
b. What is the EAR of borrowing from your parents?
c. If you plan to repay the $2400 in equal monthly instalments, what would be the rates to use in the following annuity formulas to calculate your monthly payments.
i. Assume you borrowed with the credit card.
ii. Assume you borrowed from your parents.
1
C
PV(annuity of C for n periods with interest rate r) = Cx
(1 + r)n
or PV(growing perpetuity) =
r-g
a. EAR =
(Round to six decimal places.)
Transcribed Image Text:Your friends are going to Puerto Vallarta, Mexico, over Reading Week and you want to go too. Unfortunately, you haven't been good at saving, so you need to borrow $2400 to pay for the trip. You can finance the trip on your credit card at a rate of 23% APR with daily compounding. Alternatively, your parents (who are both bankers) are willing to lend you the money at a rate of 11% per six months compounded every six months. a. What is the EAR of borrowing with your credit card? (Assume 365 days in a year.) b. What is the EAR of borrowing from your parents? c. If you plan to repay the $2400 in equal monthly instalments, what would be the rates to use in the following annuity formulas to calculate your monthly payments. i. Assume you borrowed with the credit card. ii. Assume you borrowed from your parents. 1 C PV(annuity of C for n periods with interest rate r) = Cx (1 + r)n or PV(growing perpetuity) = r-g a. EAR = (Round to six decimal places.)
Expert Solution
steps

Step by step

Solved in 2 steps with 2 images

Blurred answer
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education