In Chapter 1 of the text (1-13) you will look at calculating a monthly payment f

Question

In Chapter 1 of the text (1-13) you will look at calculating a monthly payment for a loan. A simpler problem is to compute the amount a loan would cost you in one month Using information from an internet source, determine the current interest rate a credit card or loan. Suppose you borrow $1000 (or spend $1000) on a credit card. How much will you owe in one month? 6 months if you pay nothing for 6 months? Compute the 6 month cost in two ways: 1. Make 6 monthly computations. Enter these as formulas in a spreadsheet. (The goal here is really getting you to use spreadsheets and formulas for computations.) 2. Use the formula, A- 1000(1+rN where N - the number of periods (6) and r - the periodic interest rate APR/12, where APR is the annual percentage rate.

Explanation / Answer

Annual interest rate for credit card is 24% and for personal loan, the annual interest rate is 12%.

If $1000 is spent on a credit card.

A = $1000

Monthly interest rate = R = Annual interest rate / 12 = 24%/12 = 2%

In one month, n = 1 month

Amount to be owed = A*(1+R)^n = 1000*(1+2%)^1

Amount to be owed = $1020

In 6 month, n = 6 month

Amount to be owed = A*(1+R)^n = 1000*(1+2%)^6

Amount to be owed = $1126.16

It is assumed that there is no any free credit period on credit card and no other service charges are applied at the time of the billing.

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