Chapter 7

Rebecca wants to buy a new saddle for her horse. The one she wants usually costs $500, but this week it is on sale for $400. She does not have $400, but she could buy it with $50 down and pay the rest in 6 months with 10 percent interest. Does Rebecca save any money buying the saddle this way

Interest = P × r × T = ($400 - 50) × 0.10 × (6 / 12) = $17.50 Total cost = Down payment + Principal borrowed + Interest = $50 + 350 + 17.50 = $417.50 Amount saved = Regular price - Total cost = $500 - 417.50 = $82.50

Dave borrowed $500 on January 1, 2017, and paid it all back at once on December 31, 2017. The bank charged him a service charge of $5 and interest was $50.

Annual finance charge = Interest + Other costs = $50 + 5 = $55 APR = Annual finance charge / Principal borrowed = $55 / $500 = 0.11, or 11%

Item7 1.66/1.66 points awarded Item Scored Print References Show correct answers Item 7 Item 7 1.66 of 1.66 points awarded Item Scored What are the interest cost and the total amount due on a six-month loan of $1,500 at 13.2 percent simple annual interest?

Interest = P × r × T = $1,500 × 0.132 × (6 / 12) = $99 Total amount due = Principal borrowed + Interest = $1,500 + 99 = $1,599

Sidney took a cash advance of $200 by using checks linked to her credit card account. The bank charges a cash advance fee of 2 percent on the amount borrowed and offers no grace period on cash advances. Sidney paid the balance in full when the bill arrived. (a) What was the cash advance fee? (b) What was the interest for one month at an APR of 18 percent? (c) What was the total amount she paid?

(a) Cash advance fee = Rate × Principal borrowed = 0.02 × $200 = $4 (b) Interest = P × r × T = $200 × 0.18 × (1 / 12) = $3 (c) Total repayment = Principal borrowed + Cash advance fee + Interest = $200 + 4 + 3 = $207

Damon convinced his aunt to lend him $2,000 to purchase a plasma digital TV. She has agreed to charge only 6 percent simple interest, and he has agreed to repay the loan at the end of one year. How much interest will he pay for the year?

I = P × r × T = $2,000 × 0.06 × 1 = $120

You can buy an item for $100 on a charge with the promise to pay $100 in 90 days. Suppose you can buy an identical item for $95 cash. If you buy the item for $100, you are in effect paying $5 for the use of $95 for three months. What is the effective annual rate of interest? Ignore interest rate compounding.

I = P × r × T $5 = $95 × r × 3 / 12 95r = 20 r = 20 / 95 r = 0.2105, or 21.05%

Your uncle lends you $2,000 less $100 (interest at 5 percent), and you receive $1,900. Use the APR formula to find the true annual percentage rate. Assume you repay the entire loan in one year.

APR = (2 × n × I) / [P × (N + 1)] = (2 × 1 × $100) / [$1,900 × (1 + 1)] = 0.05263, or 5.263%

Dave borrowed $500 for one year and paid $50 in interest. The bank charged him a service charge of $5. What is the finance charge on this loan?

Finance charge = Interest + Other costs = $50 + 5 = $55

Dave borrowed $500 on January 1, 2017. The bank charged him a service charge of $5 and interest was $50. If Dave paid the $500 in 12 equal monthly payments, what was the APR?

Finance charge = Interest + Other costs = $50 + 5 = $55 APR = (2 × n × I) / [P × (N + 1)] = (2 × 12 × $55) / [$500 × (12 + 1)] = $1,320 / $6,500 = 0.203, or 20.3%

Dorothy lacks cash to pay for a $600 dishwasher. She could buy it from the store on credit by making 12 monthly payments of $52.74. The total cost would then be $632.88. Instead, Dorothy decides to deposit $50 a month in the bank until she has saved enough money to pay cash for the dishwasher. One year later, she has saved $642—$600 in deposits plus interest. When she goes back to the store, she finds the dishwasher now costs $660. Its price has gone up 10 percent. Was postponing her purchase a good trade-off for Dorothy?

No, it was not a good trade-off for Dorothy to postpone her purchase. By waiting one year, she had to pay more to buy the dishwasher. Now she had saved $642, but the price of the dishwasher has increased from $600 to $660. If she had used credit to buy the dishwasher a year before, she would have paid only $632.88. However, it is possible that not incurring a debt and not being responsible for monthly payments were more important to Dorothy than the money she would have saved if she had used credit.

After visiting several automobile dealerships, Richard selects the used car he wants. He likes its $10,000 price, but financing through the dealer is no bargain. He has $2,000 cash for a down payment, so he needs a loan of $8,000. In shopping at several banks for an installment loan, he learns that interest on most automobile loans is quoted at add-on rates. That is, during the life of the loan, interest is paid on the full amount borrowed even though a portion of the principal has been paid back. Richard borrows $8,000 for a period of four years at an add-on interest rate of 11 percent. (a) What is the total interest on Richard's loan? (b) What is the total cost of the car? (c) What is the monthly payment? (d) What is the annual percentage rate (APR)?

(a) Interest = P × r × T = $8,000 × 0.11 × 4 = $3,520 (b) Total cost = Down payment + Total interest + Principal = $2,000 + 3,520 + 8,000 = $13,520 (c) Monthly payment = (Principal borrowed + Total interest) / Total number of payments = ($8,000 + 3,520) / 48 = $240 (d) APR = (2 × n × I) / [P × (N + 1)] = (2 × 12 × $3,520) / [$8,000 × (48 + 1)] = $84,480 / $392,000 = 0.2155, or 21.55% Next Visit question mapQuestion 8 of 12 Total 8 of 12 Prev

Bobby is trying to decide between two credit cards. One has no annual fee and an interest rate of 18 percent, and the other has an annual fee of $40 and an interest rate of 8.9 percent. (a) If Bobby pays his credit card balance in full each month, which card should he choose? (b) If Bobby just pays the minimum payment and carries a balance from one month to the next, which card should he choose?

(a) Since Bobby will not incur any interest charges, he should select the card without the annual fee. (b) Since Bobby will incur interest charges, he should most likely select the card with the lower interest rate.