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10. You want to purchase a new car. After reviewing your budget, you determine that you are able to afford payments of up to $300
10. You want to purchase a new car. After reviewing your budget, you determine that you are able to afford payments of up to $300 per month and wish to take out a loan for 5 years (60 months). You currently have a trade-in vehicle worth $10,000. You look at average rates for different credit scores and find that if your credit score is above 720, you will be able to get a rate of 3.5%. However, if your credit score is below 600, you end up paying a rate of 14.5%. a. Since auto loans are paid monthly, determine the most expensive car you can afford with a high credit score and a low credit score. Don't forget about the value of your trade-in! (10) b. How much does a bad credit score cost you in buying power? That is, how much less can you afford to offer for the car as a result of bad credit? (5) 11. The distributions of rates of return for Companies AA and BB are given below: AA BB -10% State of the Probability of Economy This State Occurring Boom 0.2 30% Normal 0.6 10% Recession 0.2 -5% a. What is the expected return for each company? (6) 5% 50% b. What is the standard deviation of returns for each company? (6) c. Which company provides the lowest risk per unit of return? (2)
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