1. After deciding to buy a new car, you can either lease the car or purchase it on a three-year loan. The car you wish to buy costs $35,000. The dealer has a special leasing arrangement where you pay $99 today and $499 per month for the next three years. If you purchase the car, you will pay it off in monthly payments over the next three years at 6% APR. You believe you will be able to sell the car for $23,000 in three years. What is the PV of leasing cost? What is the PV of the purchasing cost? Should you lease or purchase? Why?

(hint: The leasing option is a three-year annuity. The loan for purchasing the car is also an annuity. But in the purchasing option, you can sell the car at the end of year 3 so you have to subtract the PV of the sales price from your cost.)

2. What is the effective annual rate associated with an 8% APR when interest is compounded (1) annually (m=1); (2) semiannually (m=2); and (3) quarterly (m=4).

3. Big Doms Pawn Shop charges an interest rate of 27 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. What rate should the shop report? What is the effective annual rate?