Rudy and Karyn have approached you about a few questions relating to debt manage
ID: 2722327 • Letter: R
Question
Rudy and Karyn have approached you about a few questions relating to debt management. They have relatively solid credit score so they think it might be beneficial to take on additional debt to invest in properties and other assets. Below are facts you have gathered regarding their current credit line (we’ll call it Credit Line 1):
-Average monthly balance on credit card: $6,000
- Annual Interest Rate: 20%
- Finance Charges: $250 per year
- Management fees: $150 per year
Problem 1: What is the APR that Rudy and Karyn are paying on Credit Line 1? What does this number represent? (Hint: consider all additional expenses related to taking on debt, not just annual interest rate and follow the examples in the Madura text exhibit 9.2 at the bottom of p. 238 in text. For example the interest rate for Bank A is 200/2000 or 10%; for Bank B it is 160/2000 or 8% but the APR for Bank B is 13% and you can see why in that table).
Explanation / Answer
Annual Interest = principal x interest rate
= 6000 x 20%
= 1,200
Total annual charges = 1200 + 250 +150
= 1600
APR =total annual charges / average monthly balance
= 1600 / 6000
= 26.67%
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