Christie is buying a new car today and is paying a $500 cash down payment. She w

Question

Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase?

A. The present value of the car is equal to $500 + (36 × $450).
B. The $500 is the present value of the purchase.
C. The car loan is an annuity due.
D. To compute the initial loan amount, you must use a monthly interest rate.
E. The future value of the loan is equal to 36 × $450.

Explanation / Answer

The answer is actually D. The interest is compounded monthly but at a rate of 1/12 the annual interest rate (7.25/12)

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