1. You want to buy a boat and you are willing to devote 7% of your current gross salary towards making loan payments on the boat. Your current annual gross salary is $52,000. A 5-year (60-month) boat loan is available with a 7.2% (annual) interest rate, payments to be made monthly at the end of each month. What is the total purchase price of the most expensive boat you can purchase, given the above parameters (interest rate, loan term, and your willingness to spend 7% of your salary on the loan)?
2. Assume you borrow $12,000 today at an interest rate of 8% per year. The loan is to be repaid in 6 equal end-of-year payments. What is the amount of each annual payment to be made? For the year 2 payment, how much of the payment is for interest and how much is for the repayment of principal. What is the outstanding loan balance after the year 2 payment has been made?
3. A savings account pays an 8.4% annual interest rate, compounded monthly. What is the effective annual rate (EAR) for the savings account?