Reference no: EM131573866
Two loan offers on the same car lead to the same stream of same-risk payments: $268.00 per month for 60 months. When evaluated on a no-buyout, 60-month basis, both offers create the same amount of value for the dealer involved. One offer features an instant rebate and i=r financing, while the other features low (i<r) financing, but no rebate.
The dealer decides to keep this loan and not sell it in the financial markets. Now if there is some positive chance that the borrower will pay off the loan before it matures in 60 months, then which of the offers will the dealer prefer? Think about the graphs in your notes.
a. The offer with the instant rebate is better for the car dealer.
b. The offer with the low financing is better for the car dealer
c. You can’t be sure which offer is better; specifically, you need more information on what the competitive values are for CP and r in this situation.
d. The two offers are identical to the dealer, they do not prefer one over the other.
What's the answer and why?
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