Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Suppose you want to save money to buy a new car. Based on your monthly budget, you can afford up to $275 per month. You can either put this in a savings account to save the money or you can use it for a monthly car payment. In any case, you start hitting the car lots to start shopping.
(a) You first go to a used car lot. You find a used Corolla for $6000. The dealer offers you a loan at 5% add-on interest over 3 years. Do the calculation and decide whether this fits into your budget.
(b) You also check out some new cars. You find a new Corolla for $19,500. The dealer offers you a loan at a rate of 4.5% interest, compounded monthly, over 5 years. Do the calculations and decide if it
fits into your budget.
(c) You start thinking...maybe I should save up a down payment for a car before buying it outright. So you decide to save your $275 per month for 2 years by putting it into a savings account that earns 1.5% interest, compounded monthly. Use this to figure out how large of a down payment you’ll have in 2 years, then decide if you can afford the new car with this down payment.
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