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View History Bookmarks People Window Help 78% , Thu 10:47 pM Joe Jag e Econ1 170 voe03 registratio x G Search Textbook Solutions : Connect x -G the data below represent e https: 9 Part 2 Help Save & ExitSubmit Angela owes $500 on a credit card and $2,000 on a student loan. The credit card has a 15 percent annual interest rate and the student loan has a 7 percent annual interest rate. Her sense of loss aversion makes her more anxious about the larger loan. As a result, she plans to pay it off first-despite the fact that professional financial advisors always tell people to pay off their highest- interest-rate loans first. Suppose Angela has only $500 at the present time to help pay down her loans and that this $500 will be the only money she will have for making debt payments for at least the next year Instructions: Enter your answers as whole numbers a. If she uses the $500 to pay off the credit card, how much interest will accrue on the other loan over the coming year? (Hint If you owe X dollars at an annual interest rate of Y percent, your annual interest payment will be X x Y, where the interest rate Y is epressed as a decimal.) b. On the other hand, if she uses the $500 to pay off part of the student loan, how much in combined interest will she owe over the next year on the remaining balances on the two loans? c. By how many dollars will she be better the student loan? off if she uses the $500 to completely pay off the credit card rather than partly paying down 80 808 4 5 6 8 9 0Explanation / Answer
a)
Interest accrued on student loan = 7% of $2000 = $140
b)
Interest on credit card = 15% of $500 = $75
Interest on remaining student loan = 7% of ($2000-$500) = $105
Combined interest accrued = $75+$105 = $180
c)
She will be better off by $180-$140 = $40
a)
Interest accrued on student loan = 7% of $2000 = $140
b)
Interest on credit card = 15% of $500 = $75
Interest on remaining student loan = 7% of ($2000-$500) = $105
Combined interest accrued = $75+$105 = $180
c)
She will be better off by $180-$140 = $40
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