Ch.7BA218 PersonalFinance

Step 5: Deborah pays off her loan after only 8 months, which is two-thirds (8/12 = 2/3) of the way through the loan. Deborah might (incorrectly) expect to owe only $1,500 of the original amount borrowed (the remaining third of the original amount borrowed). (Note: Round your answer to the nearest cent.) However, in reality, Deborah still owes $ ___ of the original amount borrowed (from step 4). Now you can calculate the prepayment penalty as follows:$ ___ (Amount of Original Loan Unpaid) - $1,500 = $ ___ (Prepayment Penalty)

$1,647.69 ; $1,647.69 ; $147.69

If you make a late payment on the account, then you are assessed a late-payment fee. If you make a late payment with an account balance up to $500, then the late-payment fee is $ ___ . However, if you make a late payment with an account balance greater than $500, then the late-payment fee is $ ___ .

$12 ; $30

Step 1: Divide the amount of the loan by 1,000. Dividing $ ___ (loan amount) by 1,000 gives you a value of ___ .

$15,000 ; 15

Step 4: Determine how much of the original amount borrowed remains unpaid. Subtract the amount of the principal that has been repaid (from step 3) from the original amount borrowed: (Note: Round your answer to the nearest cent.) $4,500 (Original Amount Borrowed) - $ ___ (Amount of Principal Repaid) = $ ___ (Principal Left Unpaid)

$2,852.31 ; $1,647.69

In month 3, the payment amount is $183.36. Of this payment amount, $ ___ pays interest, and $ ___ repays the principal.

$25.36 ; $158.00

If you make a payment by check and your check bounces, then you are charged a bounced-check fee of $ ___ .

$30

If your balance exceeds the credit limit on the account (by either making excessive purchases or fees charged to the account), then you are assessed an over-the-limit fee of $ ___ each month that the balance exceeds the credit limit.

$30

This credit card has an annual fee of $ ___ , which is charged to the borrower's account ___

$35 ; Once per year

Step 2: Use the APR and the number of monthly payments to identify the appropriate figure to use from the table. In this case, the APR is 9%, and the loan requires 24 monthly payments. Therefore, the relevant amount from the table is $ ___ .

$45.68

To compute the monthly finance charge for a credit card account, you must first calculate the average daily balance, which is the sum of the outstanding balances owed each day divided by the number of days in the billing period. The average daily balance has been assumed in the following example. Use the assumed average daily balance together with the periodic rate from part A to calculate the finance charge for the month of March. Part B: Calculate the Finance Charge Suppose that for the month of March your average daily balance has been computed to be $600. Now use the periodic rate from part A to calculate the finance charge: (Note: Round the average daily balance to two decimal places, the periodic rate to four decimal places, and the finance charge to two decimal places.) (Average Daily Balance) x (Periodic Rate *as a decimal*) = (Finance Charge)

$600 x 0.0075 = 4.50

Step 3: After 8 months, Deborah has made a total of $3,480 in payments. Subtract the total amount of interest paid (from step 2) from $3,480. This gives you the amount of the $4,500 originally borrowed that has been repaid. Perform this calculation to determine how much of the original loan (the principal) has been repaid: (Note: Round your answer to the nearest cent.) $3,480 (Total Payments Made) - $___ (Interest Paid) = $ ___ (Amount of Original $4,500 Borrowed That Has Been Repaid)

$627.69 ; $2,852.31

Step 3: Multiply your answer from step 1 by the appropriate value from the table cell (from step 2). This gives you a required monthly payment amount of $ ___ .

$685.20

Consider the following example: Assume that Hilary Taylor from New Orleans, Louisiana borrows $2,500 for four years at 7% add-on interest to be repaid in 48 monthly installments. Step 1: Calculate the amount of add-on interest (in dollars) for Hilary's loan.(Hint: Use the equation I = PRT, where I is the interest in dollars, P is the amount borrowed, R is the interest rate, and T is the time of the loan in years.)The add-on interest for Hilary's loan is $ ___ .

$700.00

Scenario: You are 30 years old, married, have two children, and household income (take-home pay) of $3,500 per month. Your credit and consumer debt is as follows: •Car loan, 6% interest rate, $10,000 balance, $295 per month •Department store card, 28% interest rate, $600 balance, minimum payment 5% of balance •Discover Card, 12% interest rate, $2,000 balance, minimum payment 2% of balance •VISA Card, 13% interest rate, $3,000 balance, minimum payment 2% of balance •MasterCard 1, 14% interest rate, $4,000 balance, minimum payment 2% of balance •MasterCard 2, 14% interest rate, $0 balance, minimum payment 2% of balance •Gasoline card, 21% interest rate, $300 balance, minimum payment 5% of balance Assume all credit cards will assess a $35 late fee and ongoing penalty interest of 8% above the current rate if you miss a payment. Your recent VISA card statement came with a blank cash advance check (for up to $10,000) with terms of 23.99% APR and a fee of 3% if you use it. Your recent MasterCard 2 statement came with a balance transfer offer (up to $4,000) with no fee and 0% APR for 12 months, after which the normal interest rate applies. You recently found an incorrect amount charged on your VISA card from a store you frequent often. You'd like to come up with a plan to eliminate all of your credit card debt.

**Use for following questions 38 -48

For balance transfers, the introductory (teaser) APR is ___ %. But after the introductory period, the APR for balance transfers reverts to the higher APR of___ %. The regular APR for balance transfers is calculated by adding ___ % to the prime rate (assumed to be 4%).

0.00% , 10.99% , 6.99%

If you divide the APR (annual percentage rate) for a credit card account by the number of billing cycles per year (usually 12), the result is known as the periodic rate. Consider the following example: Part A: Calculate the Periodic Rate Suppose that your credit card has an APR of 9%. Assuming that there are 12 billing cycles per year, the periodic rate would be ___ % per month (Note: Rounded to two decimal places). Expressed as a decimal, the periodic rate is ___ . (Note: Rounded to four decimal places).

0.75% ; 0.0075

Assume that Kim Cuttner from Reno, Nevada, borrows $1,500 for six years at 5% add-on interest to be repaid in monthly installments. 1. Use the add-on equation I = PRT, to calculate Kim's finance charge in dollars: $ ___ 2. Now add the interest in dollars to the original amount borrowed (the principal). The total amount that Kim must repay is $ ___ 3. Divide the total amount owed by the number of monthly payments (72 payments) to obtain Kim's monthly payment. (Round the payment to the nearest penny.) Kim must make 72 monthly payments of $ ___ each.

1. $450.00 2. $1,950.00 3. $27.08

Jalil Ngumi from Brooklyn, New York, borrows $4,500 (including interest) for two years (24 months) at an interest rate of 11% per year. The loan uses the discount method for determining the amount of interest. 1. How much of the loan amount ($4,500) consists of interest? $ ___ 2. How much of the loan is actually given directly to Jalil? $ ___ 3. What is the monthly payment (rounded to the nearest penny), assuming 24 monthly payments? $ ___

1. $990.00 2. $3,510.00 3. $187.50

In the following table, categorize each given item as installment credit or noninstallment credit: 1. One form of this type of credit is a credit card (or charge card), which is a plastic card identifying the holder as a participant in the lender's charge account plan. 2. This type of credit usually has a credit limit, which is the maximum outstanding debt that will be allowed on the credit account. 3. This type of credit is also called closed-end credit. 4. The simplest form of this type of credit is a single-payment loan in which the original amount borrowed plus interest is due at the end of an agreed-on time period. 5. This type of credit may consist of open-end credit (also called revolving credit), which is credit extended in advance of any transaction, so that borrowers do not need to reapply each time they need to use the credit. 6. A personal line of credit is a form of open-end credit in which the lender allows the borrower to access a prearranged revolving line of credit. 7. Service credit is credit granted to consumers by public utilities, physicians, dentists, and other service providers that do not require full payment when services are rendered. 8. With this type of credit, the borrower must repay the amount owed plus interest in a specific number of equal payments.

1. Non-installment Credit 2. Non-installment Credit 3. Installment Credit 4. Non-installment Credit 5. Non-installment Credit 6. Non-installment Credit 7. Non-installment Credit 8. Installment Credit

Step 3: Use the equation APR = Y (95P + 9)F / 12P(P + 1)(4D+F )Y (95P + 9)F12P(P + 1)(4D+F ) to estimate the APR for Hilary's loan. Round your answer to the nearest 0.1%.The APR for Hilary's loan is estimated to be ___ %.

12.7

This account does not have an introductory (teaser) APR for cash advances. For cash advances, the APR is calculated by adding ___ % to the U.S. prime rate (cited at 4% in the disclosure). Therefore, variable APR for cash advances is at least ___ %.

14.99 , 18.99%

These introductory and regular rates apply as long as you have not defaulted on any terms of the account. To receive these rates, you must make no late payments, you must not exceed your credit limit, and your payment checks must not bounce. If you fail to meet any of these terms, then you will be charged at the much higher default rate. According to the disclosure, the default rate is calculated by adding ___ % to the U.S. prime rate (cited at 4% in the disclosure). Therefore, if you assume a prime rate of 4%, then the variable default rate is ___ %.

24.99% , 28.99%

This credit account carries a temporary low introductory rate (teaser rate) of ___ %. This teaser APR applies to purchases made within the first ___ months that the account is open. After this introductory period, the APR for purchases reverts to a higher variable APR. This regular APR for purchases is calculated by adding ___ % to the U.S. prime rate (assumed to be 4% in the disclosure). Therefore, if the U.S. prime rate remains at 4%, then the regular APR for purchases is ___ %.

3.99% , Six, 6.99% , 10.99%

After paying off all of your credit card balances, should you cancel all of your cards? 1. No, there are perks and rewards programs of which I can take advantage, but I will pay the balance in full each month from now on. 2. No, discontinued credit cards will have a negative effect on my credit score. 3. No, there are instances, such as when making a hotel reservation or renting a car, when a credit card is required. 4. All of these are reasons for keeping and managing wisely some credit cards.

4

The transaction fee for cash advances is ___ % of the amount of the advance, with a minimum fee of $ ___ . This fee ___ charged if you take a cash advance during the six-month introductory period.

4% ; $15 ; IS

The transaction fee for balance transfers is ___ % with a minimum fee of $ ___ . This fee ___ charged if you transfer balances from another credit account to this credit card during the six-month introductory period.

4% ; $45 ; Is Not

To constitute a valid dispute, you must file your complaint within ___ days after the date on which ___ , while the credit card issuer has another ___days to acknowledge your notification of the dispute. The issuer must resolve your claim within a maximum of ___ days.

60 the first bill containing the error was mailed to you 30 90

Deborah Goldman from Lincoln, Nebraska, has borrowed $4,500 for 12 months plus an additional finance charge of $720. She is scheduled to pay equal monthly installments of $435 ($5,220 / 12). Assume that Deborah wants to pay off the loan after only 8 months. Step 1: Each month of Deborah's loan is assigned a value (12 for the first month, 11 for the second month, 10 for the third month, and so on). Deborah has the loan for the first 8 months. Adding up the values for each of the first 8 months gives you the following number: ___

68

Step 2: According to the rule of 78s method, the lender assumes that a portion of the $720 add-on interest has already been paid. To determine how much interest that Deborah has already paid, divide your answer from step 1 (the sum of the values for each month that Deborah has the loan) by 78. Then multiply this ratio by the total amount of add-on interest ($720). (Note: Round your answer to the nearest cent.)Interest Paid = ( ___ / 78) x $720 = $ ___

68 ; $627.69

American Express issued Matthew's credit card. Matthew often uses his credit card for food and lodging expenses while he is away on business, but he must pay an annual membership fee of $150. Moreover, the entire balance charged on the card must be repaid within 30 days. Some retail locations that do accept credit cards issued by Visa or MasterCard do not accept this card. Matthew's credit card is probably best classified as ___ .

A T&E Credit Card

Assuming that you do not charge anything else to your Discover card and that you continue to make the current month's minimum required payment until the debt is repaid, it will take ___ to totally repay your outstanding balance.

Between 12 and 24 months

You can see from this sample repayment schedule that the repayment amount generally remains the same from month to month. However, as the months progress, a ___ percentage of the payment pays interest, and a ___ percentage repays the principal.

Lower ; Greater

After making the payments recommended above, should you use the VISA cash advance check to repay your remaining credit card obligations?

No, absolutely not, the interest rate is higher than any other remaining debt plus additional fees would also be incurred.

In general, is it a good idea to make only minimum payments on your credit cards?

No, the small payment requirement is mathematically guaranteed to keep you in debt for many years.

You have an incorrect charge on your VISA card. What is the first step you should take to resolve this error?

Notify the merchant involved.

When disputing the error in your VISA card statement, be prepared to provide the following documentation to your credit card issuer: ___

Photocopies of the receipt and credit card statement

When designing a plan to pay off your credit card debt, which credit card should be repaid first?

The department store card, because it has the highest interest rate.

Step 2: Identify the values of the following variables in preparation for calculating the APR using the n-ratio method. Y = Number of Payments in One Year = ___ F = Finance Charge in Dollars (Add-on Interest from Step 1) = $ ___ D = Debt (Amount Borrowed) = $ ___ P = Total Number of Scheduled Payments = ___

Y = 12 F = $700.00 D = $2,500.00 P = 48

After making the payments recommended above, should you take advantage of the balance transfer offer from MasterCard 2?

Yes, from MasterCard 1, it will save you the 14% interest charges for a year.