Simple question understand, completely, beginning

mouse123

Ran across a practice question, and although I got it correct through elimination, I don't understand it exactly.

q: Assume you buy a computer for $1,350 and agree to pay for it with 24 payments of $45, beginning next month. What is the size of the final payment needed at month 24 to completely pay off the computer, if the interest rate you are being charged is 16% per year, compounded monthly?

a: $592.21

Shouldn't I enter the value for N as 23, instead of 24? Since the question is asking what will be the remaining balance after the 23rd payment? My answer was $ 628.82, but because it wasn't in the choices I went with $ 592.21 which is the correct answer.

My only thought would be the question is referring to the balloon payment after the 24th payment, but it just seems worded poorly. Or, is it just me?



Edited 1 time(s). Last edit at Wednesday, May 25, 2011 at 04:42PM by MiserableLawStdnt.

Chuckrox

It's asking you the remaining payment needed after the 24th. The wording is just confusing. Put in the following and you'll get your answer:

PV: $1,350
n: 24
PMT: -$45
i: 1.33333 (16/12)
CPT->FV
=$592.21

That'll be the remaining balance of the loan at that point in time.

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IAmNeil

Isn't the final payment really 592.21 + 45 = 637.21?

You can't put use N = 23 because you need the compounding during the 24th period.

Poorly worded question for sure. Hope that wasn't from CFAI.

sameeragarwal

I got the right answer, I just thought the question was poorly worded. It is from Allenresources. In fact I think a lot of their questions and answers are very poorly worded. Any help on where I can find better questions?

economicz

MiserableLawStdnt Wrote:
-------------------------------------------------------
> I got the right answer, I just thought the
> question was poorly worded. It is from
> Allenresources. In fact I think a lot of their
> questions and answers are very poorly worded. Any
> help on where I can find better questions?

Most people stick with Schweser or Stalla for good reason. They're not perfect, but they are [combined with hard work and review of the CFAI books] generally acceptable.

------------------------------------------------------------------
Every body do not forget I can clear describe my case ; I am not crazy ! I talk the truth only.
-qqqbee