Tim will borrow $6200 at 12.5% APR. He will pay it back over 2 years. What will be his Monthly payment be?

A) $207.39

B) $210.43

C) $290.41

D) $293.32

The correct answer is D) $293.32.

Explanation:

We use the formula P=A/D, where P is the payment amount, A is the amount borrowed, and D is the discount factor.

The discount factor is given by the formula D={[ (1+r) ^n]-1}/[i (1+i) ^n], where i is the monthly interest rate as a decimal number and n is the number of months taken for repayment.

For this problem, we have 12.5%; 12.5%=12.5/100=0.125.

This makes the monthly interest rate, i, 0.125/12=0.01042.

The number of months for repayment, n, will be 2*12=24.

Using these we have D={[1+0.01042) ^24]-1}/[0.01042 (1+0.01042) ^24], which gives us D=21.1375.

We plug this in for D in our payment formula.

Additionally, we know that A=6200, since that is what is borrowed: P=6200/21.1375=293.32.