Title of articile: Now the Fed Must Reckon With Long-Term Strategy Link: https:/

Question

Title of articile: Now the Fed Must Reckon With Long-Term Strategy

Link: https://www.wsj.com/articles/now-the-fed-must-reckon-with-long-term-strategy-1528643201?mod=ITP_us_0&tesla=y

Summary: The Federal Reserve will be raising interest rates once again this year during Wednesday’s meeting. The last time the key interest rate was increased was in March where the rate went from 1.5% to 1.75%, the highest it has been in 10 years. The actual amount of the increase to occur on Wednesday is unknown and there is speculation to believe it will be relatively conservative (under 0.25%). The Fed must also decide if the rate will be increased an additional one or two more times this year, further increasing costs for borrowers and profits for lenders. Recent accelerated economic growth coupled with the unemployment rate projected to reach an all-time low over the next year, interest rates can be raised steadily with a minor risk of undermining the economy.

i need help with answering the following Questions:

Suppose the Fed increases the key interest rate this week to 2% that eventually impacts auto loans through Bank of America. You are looking to purchase a brand-new vehicle for a purchase price of $65,000 from a dealer with $18,000 as the down payment. Bank of America is offering 5-year auto loans at 3.6% interest for new cars, given your credit is pristine. What would the minimum monthly payment due?

Suppose it is now November and the Fed increased the key interest rate an additional two times since June 13th. You can now offer $25,000 as the down payment on the same vehicle that has not been discounted in any way. Bank of America now offers the same 5-year loan at a 3.9% interest rate. What would be your new minimum monthly payment?

Compare the two scenarios. Assuming that no additional payments besides the minimum monthly payments would be made on the vehicle, which scenario would save you money?

Explanation / Answer

Fed increases the key interest rate has direct impact on the interest rate charged by banks on any type of loan.

Here , we have two senerios of loan

Repayment Amount $857.12 $ 734.86

Senerio 2 is saving money for buyer

Senerio 1 Senerio 2 Cost of vehicle 65000 65000 Down payment 18000 25000 Loan Amount 47000 40000 Tenure 5 yr 5 yr Interest rate 3.60% 3.90%

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