Compare the average level of interest rates among the three types of loans, business and finance assignment help

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Business Finance

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E1 Go to the Federal Reserve Web site, http://www.federalreserve.gov. Click on the Consumer Information tab, and research consumer credit in the various hyperlinks. Find average interest rates charged by commercial banks on new automobile loans, personal loans, and credit card plans.

a.Compare the average level of interest rates among the three types of loans.

b.Click on the Economic Research & Data tab, click on the “Statistics: Releases and Historical Data” hyperlink and then “Consumer Credit,” and compare trends in the cost of consumer credit provided by commercial banks over the past three years.

P2 Find the FV of $10,000 invested now after five years if the annual interest rate is 8 percent.

a.What would be the FV if the interest rate is a simple interest rate?

b.What would be the FV if the interest rate is a compound interest rate?

P3 Determine the future values (FVs) if $5,000 is invested in each of the following situations:

a.5 percent for ten years

b.7 percent for seven years

c.9 percent for four years

P4 You are planning to invest $2,500 today for three years at a nominal interest rate of 9 percent with annual compounding.

a.What would be the future value (FV) of your investment?

b.Now assume that inflation is expected to be 3 percent per year over the same three-year period. What would be the investment’s FV in terms of purchasing power?

c.What would be the investment’s FV in terms of purchasing power if inflation occurs at a 9 percent annual rate?

P5 Find the present value (PV) of $7,000 to be received one year from now assuming a 3 percent annual discount interest rate. Also calculate the PV if the $7,000 is received after two years.

P7 Determine the present value (PV) if $15,000 is to be received at the end of eight years and the discount rate is 9 percent. How would your answer change if you had to wait six years to receive the $15,000?

P16 Use a financial calculator or computer software program to answer the following questions:

a.What would be the future value (FV) of $15,555 invested now if it earns interest at 14.5 percent for seven years?

b.What would be the FV of $19,378 invested now if the money remains deposited for eight years and the annual interest rate is 18 percent?

P17 Use a financial calculator or computer software program to answer the following questions:

a.What is the present value (PV) of $359,000 that is to be received at the end of twenty-three years if the discount rate is 11 percent?

b.How would your answer change in (a) if the $359,000 is to be received at the end of twenty years?

P19 Use a financial calculator or computer software program to answer the following questions.

a.What would be the future value (FV) of $19,378 invested now if the money remains deposited for eight years, the annual interest rate is 18 percent, and interest on the investment is compounded semiannually?

b.How would your answer for (a) change if quarterly compounding were used?

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Running Head: SET OF FINANCE QUESTIONS

Set of Finance Questions
Name
Institution
Date

1

SET OF FINANCE QUESTIONS

2
Question E1

a) Comparison of Average Level of Interest among Three Loan Types
The table below outlines the average level of interest for new car loan, credit plan loans
and personal loans as at February 2017 (Federalreserve.gov, 2017)
Loan Type

Interest

New automobile loan
46-month

4.52

60-month

4.21

Credit card plans
All accounts

12.54

Accounts assessed interest

13.86

Personal loan
24-month

10.05

From the above table, is evident that the credit plans have the highest average level of
interest and the new car loans are the lowest. The big variance between the car loan and the other
two loans can be explained by the fact that car loans are secured hence their interest are relatively
low (Federalreserve.gov, 2017). The credit card plans have the highest interest mainly because of
their revolving nature. Unlike personal loan and car loan, credit card plans do not have a finite
time period.

SET OF FINANCE QUESTIONS

3

b) Trend Comparison for the Consumer Credit
The cost of consumer credit charged by commercial bank varies over time depending on a
variety of factors. The table below summarizes commercial cost of consumer credit on personal
loans, credit card plans and car loans for the year 2014, 2015 and 2016 (Federalreserve.gov, 2017).
Loan /Year

2014

2015

2016

46-month

4.24

4.19

4.30

60-month

4.25

4.20

4.14

All accounts

11.87

12.09

12.35

Accounts assessed interest

13.19

13.66

13.66

10.22

9.75

6.69

New automobile loan

Credit card

Personal loans
24-month

From the summary in the table above, it is evident that cost of personal loan credit is very
volatile compared to the other two types of loans. It keeps changing from one year to the next by
a very big margin. The percentage change from 2014 to 2015 was 4.6% and 31.3% from 2015 to
2016. It is also evident from the above table that the cost of personal loans has reduced overtime.
The other two loans on the other do not have high percentage change. Credit card plans
cost increased from 2014 to 2015 by 1.9% and 3.6% for all accounts and account assessed interest
respectively. This is a very small change compared to the change in personal. Moreover, the cost
of accounts assessed interest credit plan did not change at all in 2016. The low percentage change
is an indication of the low volatility in the credit plan costs.

SET OF FINANCE QUESTIONS

4

Unlike the other two loans where the change whether negative or positive is consistent over
the three years, car loan cost over the years is inconsistent. Both 46-month and 60-month car loan
cost reduce in 2015. However, in 2015, the 60-month loan cost continues to decline, but the 46month loan cost increases by 2.6%.
The trend comparison discussed above shows that it is not easy to predict the cost of
different consumer credit. This is because it is influenced by a number of factors that are not easily
predicted.
Question P2
a) Future Value of Simple Interest
For simple interest, the future value is calculated using the formula below.
FV = I*{1 + (r * t)}
Where; FV stands for future value, I for original investment, r for the interest rate and t for the
investment period (Khan & Jain, 2007).
Therefore; FV = $ 10, 000 * {1+ (0.08 * 5)} = $ 14,000
b) Future Value for Interest that is compounded
The formula for future value given the interest is compounded is as shown below.
FV = I*(1 + r)t
Where; FV stands for future value, I for original investment, r for the interest rate and t for the
inves...


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