Suppose you purchase a plasma screen television for $1100.00 with a First Premie

Question

Suppose you purchase a plasma screen television for $1100.00 with a First Premier credit card that has 79.9% APR. Assuming simple interest and no monthly payments, how much interest will you owe at the end of 12 months? What will the total cost of the television be?

Suppose you open a savings account with $1100.00 at a 0.5% annual interest rate. Assume simple interest. How much interest will your account accrue at the end of 12 months? What will be the balance of your account?

In one scenario you are the lender (to the bank) in the other scenario the credit card company is the lender. Compare and contrast the two different scenarios. Is this a fair situation?

Explanation / Answer

Case 1 - Interest To be paid will be 79.9% of $1,100 which is 0.799*$1,100 = $878.90. The total interest to be paid is 878.9 and the total amount owed is principal + Interest = 1100 +878.90 =$1,978.90

Case 2- Interest that is earned on the savings account will be 0.5% of $1,100 = 0.005*1100 =$5.5 and the total balance at the end of 1 year will be 1100 +5.5 = $1,105.5.

In case 1, credit card, the interest rate is very high the amount is nearly increased two fold in a year and in the second case the bank gives you very little interest. The bank is said to be very secure and hence pays less interest.

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