Question

Suppose you received in your mailbox, a pre-approved credit card application from Flight-by-Night bank, offering an introductory interest rate of 12.00 percent per year, compounded monthly for the first 6 months, increasing thereafter to 24 percent per year, compounded monthly. Assuming you transferred/borrowed $3000 from this card and made no subsequent payments, how much interest will you owe at the end of the year?

Answer 1

Amount borrowed from credit card = $3000

Interest rate for the first 6 months is 12%per year compounded monthly while for the last 6 months it is 12% per year compounded monthly.

Calculating the Future value of amount you owe at the end of 1 year:-

where, r1 = periodic Interest for 1st 6 months = 12%/12 = 1%

n1 = No of periods = 6 months

r2 = periodic Interest for last 6 months = 24%/12 = 2%

n2 = No of periods = 6 months

Future Value = $3586.33

Total amount you owe at the end of 1 year = $3,586.33

- Interest amount you owe at the end of year 1 = $3586.33 - $3000

= $586.33

So, interest will you owe at the end of the year is $586.33