Question

Problem 4-31

Calculating Interest Expense

You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.7 percent per year, compounded monthly for the first six months, increasing thereafter to 18 percent compounded monthly. Assuming you transfer the $7,800 balance from your existing credit card and make no subsequent payments, how much interest will you owe at the end of the first year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Interest accrued $

Answer 1

Amount borrowed from credit card and no subsequent payments have been made till 1 year = $7800

Interest rate for the first 6 months is 2.7% per year compounded monthly and therafter it is 18% 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 = 2.7%/12 = 0.225%

n1 = No of periods = 6 months

r2 = periodic Interest for last 6 months = 18%/12 = 1.5%

n2 = No of periods = 6 months

Future Value = $8,644.65

Total amount you owe at the end of 1 year = $8,644.65

- Interest amount you owe at the end of year 1 = Amount you owe at the end of year 1 - Borrowed amount

= $8,644.65 - $7800

= $844.65

So, interest will you owe at the end of the year is $844.65