After a weekend of lucrative gigs, a singer finds herself with an extra $ 1,500. She...

After a weekend of lucrative gigs, a singer finds herself with an extra $ 1,500. She currently has $4350 of credit card debt, on which she is charged an annual yield of 24%. Putting $1,500 toward this would cut that debt to $1,850. Calculate the annual rate of return if she does this. Round, if necessary, to the nearest 0.1%.

Expert Solution

Note 1: Annual yield generally refers to the rate paid to a depositor by a financial institution. But the given "annual yield" is not used like that. (The term is not generally used in reference to debt)

Note 2: The term "return on investment" is used to describe profit on an investment, not a reduction in expenses.

Note 3: Let us assume time = 1 year. (since it is not mentioned in problem)

Note 4: payment date is not given, so, for maximum impact, we must assume 1 January.

Note 5: An annual percentage of 24% is given ( i.e simple interest ), an uncommon method for most loans, with the exception of real estate loans.

That being said, $4350 carried at 24% for one year, would cost $4350 * ( 0.24 ) = $1,044

If a payment of $1,500 is made on 1 January, and the balance carried for the entire year, then

$4350 - 1500 = $2850 * ( 0.24 ) = $684

The expense reduction will be $1044 - 684 = $360.00

The "return on investment" will be $360.00 ÷ $1500 = 0.24 = 24%

milcah answered 1 year ago

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