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You plan to purchase a car. The dealer is offering special financing at an annual percentage rate (APR) of 8 percent for 100 percent of

You plan to purchase a car. The dealer is offering special financing at an annual percentage rate (APR) of 8 percent for 100 percent of the car value. The inflation premium is 3.5 percent. If the pure rate in the market is 3 percent, what is the risk premium using the multiplicative form? Show your solution



The pure rate of interest is 2.5 percent and the inflation premium is 5 percent. If you require a risk premium of 3.5 percent, what is the risk-free rate? Use exact formulation. (Hint: Set risk premium equal to zero).Show your calculations




A bank wishes to earn a pure rate of 2 percent, and the inflation premium is 1.6%. The bank uses the Fair Issac Corporation (FICO) score to determine car loan rate for its customers. Based on an automobile loan applicant's FICO score, it uses the following risk premium adjustment to the rate it quotes. 

 FICO Score.       Risk Premium %

>740                 1.00%

720-739           1.10%

700-719           1.30%

680-699          1.60%

660-679          1.90%

640-659           2.20%

620-639           2.50%

<620.                 7.50%


Annual percentage rate (APR) is 5.91% quote to John Smith who has a FICO score of 645.  If John Smith's FICO score drops to 615, what will be the percent change in the APR? show your Solution



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SOLUTION Question 1 To calculate the risk premium using the multiplicative form we need to subtract the pure rate and inflation premium from the APR APR Pure rate Inflation premium Risk premium Given ... blur-text-image

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