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You are interested in purchasing an automobile but you require financing. The dealer has provided you with several loan options to finance the purchase. Your market rate of return for the risk that you pose various lenders is 7%. The automobile that you want to purchase has a sticker price of $35,000 and a competitive market value of $31,000. Here are your loan options: Loan 1: loan has a term of 60 months, a contractual rate of interest of 8% and requires a down payment of $1,500 for the purchase of the car. The loan allows you to claim a rebate of $1,000 on the car at purchase. Loan 2: The loan has a term of 72 months, a contractual rate of 7.5% and requires a down payment of $1,000 for the purchase of the car. The loan allows you to claim a $500 rebate. Loan 3: The loan has a term of 36 months a contractual interest rate of 0% and requires $4,000 down. No rebate is available for this option. What is the value created or value destroyed for Loan 3 (round to the nearest dollar)? (Do not round interim calculations) Multiple Choice Loan 3 creates $3,780 in value Loan 3 destroys $3,780 in value Loan 3 creates $888 in value Loan 3 destroys $888 in value none of the above

You are interested in purchasing an automobile but you require financing. The dealer has provided you with several loan options to finance the purchase. Your market rate of return for the risk that you pose various lenders is 7%. The automobile that you want to purchase has a sticker price of $35,000 and a competitive market value of $31,000. Here are your loan options: Loan 1: loan has a term of 60 months, a contractual rate of interest of 8% and requires a down payment of $1,500 for the purchase of the car. The loan allows you to claim a rebate of $1,000 on the car at purchase. Loan 2: The loan has a term of 72 months, a contractual rate of 7.5% and requires a down payment of $1,000 for the purchase of the car. The loan allows you to claim a $500 rebate. Loan 3: The loan has a term of 36 months a contractual interest rate of 0% and requires $4,000 down. No rebate is available for this option. What is the value created or value destroyed for Loan 3 (round to the nearest dollar)? (Do not round interim calculations) Multiple Choice Loan 3 creates $3,780 in value Loan 3 destroys $3,780 in value Loan 3 creates $888 in value Loan 3 destroys $888 in value none of the above

Essentials Of Investments
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
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You are interested in purchasing an automobile but you require financing. The dealer has provided you with several loan options to finance the purchase. Your market rate of return for the risk that you pose various lenders is 7%. The automobile that you want to purchase has a sticker price of $35,000 and a competitive market value of $31,000.    Here are your loan options:

Loan 1:   loan has a term of 60 months, a contractual rate of interest of 8% and requires a down payment of $1,500 for the purchase of the car. The loan allows you to claim a rebate of $1,000 on the car at purchase.

Loan 2:   The loan has a term of 72 months, a contractual rate of 7.5% and requires a down payment of $1,000 for the purchase of the car.   The loan allows you to claim a $500 rebate.

Loan 3:   The loan has a term of 36 months a contractual interest rate of 0% and requires $4,000 down.   No rebate is available for this option.

What is the value created or value destroyed for Loan 3 (round to the nearest dollar)? (Do not round interim calculations)

 

Multiple Choice

Loan 3 creates $3,780 in value

Loan 3 destroys $3,780 in value

Loan 3 creates $888 in value

Loan 3 destroys $888 in value

none of the above

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