question archive You plan to purchase a car
You plan to purchase a car
Subject:FinancePrice:2.87 Bought7
You plan to purchase a car. The dealer is offering special financing at an annual percentage rate (APR) of 12 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? (Please using the exact, multiplicative formulation for interest rates.)
A.1.78%
B.2.25%
C.2.72%
D.3.18%
E.3.65%
F.4.12%
G.4.59%
H.5.06%
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Answer:
H. 5.06%
Risk premium= [(1 + APR) / (1 + Inflation premium) (1+risk free rate)] - 1
= [(1 + 12%) / (1 + 3.5%) (1 + 3%)] - 1
= 1.050607 - 1
= 0.050607 or 5.06%
