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## BUSN380 Week 3 TCO 3 Problem Set 3 - Cost of Credit

by: Experthelper Notetaker

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# BUSN380 Week 3 TCO 3 Problem Set 3 - Cost of Credit

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BUSN380 Week 3 TCO 3 Problem Set 3 - Cost of Credit
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Date Created: 11/06/15
Problem Set 3  1.   Louise McIntyre’s monthly gross income is \$2,000. Her employer withholds \$400 in federal, state, and local income taxes and \$160 in Social Security taxes per month. Louise contributes \$80 per month for her IRA. Her monthly credit payments for VISA, MasterCard, and Discover card are \$35, \$30, and \$20, respectively. Her monthly payment on an automobile loan is \$285. What is Louise’s debt payments­to­income ratio? Is Louise living within her means? Debt Payments­to­Income Ratio = Monthly Credit Payments /Net Monthly Income ANS.  \$2000 – (400+160+80) = \$1360 \$1360 – (35+30+20+285) = \$370 Debt Payments­to­Income Ratio = 370/1360 = 0.272 = 27.2%       At 27% Louise is spending 7% over the recommended 20% of net income that she should be spending on credit payments, so she IS NOT living within her means. 2.   Calculating Debt Payments–to­Income Ratio.   Suppose that your monthly net income is \$2,400.  Your monthly debt payments include your student loan payment, a gas credit card and they total \$360.  What is your debt payments – to – income ratio? ANS.  \$360/\$2400 = 0.15 or 15% 3.   Dave borrowed \$500 for one year and paid \$50 in interest. The bank charged him a \$5  service charge.  A­ What is the finance charge on this loan?       ANS.  Amt. of Interest = \$50 Service Charge = \$5     Finance charge = \$55 B­ Dave borrowed \$500 on January 1, 2006, and paid it all back at once on December 31,  2006. What was the APR?       ANS.  APR = (2*n*I)/P(n+1) Principal = \$500  No. of Payments = 1 Amt. of Interest = \$50 Service Charge = \$5        2*1*50+5 / 500(1+1) = (2*55) / (500*2) = 110/1000       APR= 0.11 or 11%  C­ If Dave paid the \$500 in 12 equal monthly payments, what is the APR?  ANS.  Principal = \$500  No. of Payments = 12 Amt. of Interest = \$50 Service Charge = \$5     2*12*50+5 / 500(12+1) = (24*55) / (500*13) = 1320/6500                  APR= 0.203 or 20.3%  4.  Calculating Simple Interest on a Loan.  Damon convinced his aunt to lend him \$2,000 to  purchase a plasma digital TV.  She has agreed to charge only 6 % simple interest, and he has  agreed to  repay the loan at the end of one year.  How much interest will he pay for the year?   ANS.  Simple Interest = P * r * T Loan Amt \$2000 Rate of Interest 6% Time 1year      Interest = \$2000 *.06 * 1= \$120 5.    After visiting several automobile dealerships, Richard Welch selects the car he wants.  He likes its \$10,000 price, but financing through the dealer is no bargain. He has \$2,000 cash  for a down payment, so he needs an \$8,000 loan. In shopping at several banks for an  installment loan, he learns that interest on most automobile loans is quoted at add­on rates.  That is, during the life of the loan, interest is paid on the full amount borrowed even though  a portion of the principal has been paid back.  Richard borrows \$8,000 for a period of four years at an add­on interest rate of 11 percent. Questions a. What is the total interest on Richard’s loan? Price \$10,000 Down Payment \$2,000 Loan \$8,000 Period 4 years or 48 months Add­on Interest 11%   Total interest: I = P * r * T = \$8,000 * 0.11 * 4 = \$3,520 b. What is the total cost of the car? \$8,000 + \$3520 = \$11,520 PLUS \$2000 down!!!! + 13,250 c. What is the monthly payment? \$11,520/48 months = \$240 d. What is the annual percentage rate (APR)? APR = 2 * n * I / P (n+1) 2 * 12 * 3520 / 8000(48 + 1) \$84,480 / 392,000 = 0.2155 = 21.55% .

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