Question

You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 3.8 percent per year, compounded monthly for the first six months, increasing thereafter to 18.7 percent compounded monthly.

Assuming you transfer the $18,500 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.)

Answer 1

First we compute the balance in account after 6 months

FV= PV*(1+r)^n

= 18500*(1+ 0.038/12)^6

=18854.29

This is the balance after 6 months

We now need to compute the balance after 12 months

FV= PV*(1+r)^n

= 18854.29* (1+ 0.187/12)^6

=20687.29

Interest at the end of the first year = 20687.29 – 18500

= 2187.29