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kobusy [5.1K]
3 years ago
8

3. Suppose your credit card has a balance of $7800 and an annual interest rate of 16%. You decide

Mathematics
1 answer:
Blizzard [7]3 years ago
8 0

Answer:

  • $274.22 per month
  • $2071.92 in total interest
  • $433.48 more per month
  • $1379.52 less in interest

Step-by-step explanation:

a) The amortization formula is used to find the monthly payment (A):

  A = P(r/n)/(1 -(1 +r/n)^(-nt))

for a loan of a principal amount P at annual rate r compounded n times per year for t years.

For a borrowed amount of $7800 at 16% compounded monthly for 3 years, the payment will be ...

  A = $7800(.16/12)/(1 -(1 +.16/12)^(-12·3)) ≈ $274.22

You must pay $274.22 each month to pay off the credit card in 3 years.

__

b) The total amount repaid is 36 times this monthly payment, so is ...

  $274.22 × 36 = $9871.92

The amount by which this exceeds the principal borrowed is ...

  $9871.92 -7800 = $2071.92

You will pay $2071.92 in interest.

__

c) Changing the time period to 1 year gives the payment value ...

  A = $7800(.16/12)/(1 -(1 +.16/12)^(-12·1)) ≈ $707.70

The additional amount you must pay is ...

  $707.70 -274.22 = $433.48

You must pay $433.48 more each month.

__

d) Your total interest with the higher payments will be ...

  $707.70×12 -7800 = $692.40

The difference in interest amounts is ...

  $2071.92 -692.40 = $1379.52

You will pay $1379.52 less in total interest.

_____

<em>Caveat</em>

Here, the monthly amounts are rounded and the total repayment amount is based on that rounded value. In an actual payment situation, the final payment will be adjusted by a small amount to account for the fact that the monthly payment shown is not exact. That will affect the total interest and the difference in interest.

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