Question

Car financing for less

2-year term
up to $40,000
6% compounded annually with a $500 up-front payment

what part of the offered deal is the interest rate?
a. 2 year term
b. up to $40,000
c. 6% compounded annually
d. $500 up-front payment

Answer 1

The interest rate in the car financing deal is 6% compounded annually. It is important to understand how interest rates work as they significantly affect the total amount to be repaid on a loan. This understanding helps calculate future values of investments and the impact of interest on loans and savings. The correct option is c. 6% compounded annually

Step-by-step explanation:

In the context of the provided car financing deal, the interest rate is specified as 6% compounded annually. This means that the interest on the car loan would be calculated yearly at a rate of 6%, and the resulting interest amount gets added to the principal for the calculation of the next year's interest if not paid. The parts of the deal include the term (a. 2-year term), the maximum principal amount (b. up to $40,000), the interest calculation (c. 6% compounded annually), and the initial payment (d. $500 up-front payment). Among these, the interest rate is the 6% compounded annually.

To answer the example questions provided:

1. For a $5,000 loan at a simple interest rate of 6% over three years, the total amount of interest would be found using the formula I = PRT, where I is the interest, P is the principal, R is the rate, and T is the time in years. The total interest would be $5,000 * 6% * 3 = $900.
2. If you receive $500 in simple interest on a $10,000 loan over five years, the interest rate can be found by rearranging the simple interest formula to solve for R. So $500 = $10,000 * R * 5, resulting in R = $500 / ($10,000 * 5) = 1%.
3. If you open a 5-year Certificate of Deposit (CD) for $1,000 at 2% interest compounded annually, the future value of the CD can be calculated using the compound interest formula A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, P is the principal amount, r is the annual interest rate, n is the number of times that interest is compounded per year, and t is the time the money is invested for. Here A = $1,000(1 + 0.02)^5, which gives a value at the end of the five years.
4. Startup firms commonly raise financial capital through means such as venture capital, angel investors, crowdfunding, and taking loans or lines of credit.

The correct option is c. 6% compounded annually