Question

In: Finance

You are considering two ways of financing a spring break vacation. You could put it on...

You are considering two ways of financing a spring break vacation. You could put it on your credit​ card, at 17% ​APR, compounded​ monthly, or borrow the money from your​ parents, who want an interest payment of 10% every six months. Which is the lower​ rate?  ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.) The effective annual rate for your credit card is nothing​ %. ​(Round to two decimal​ places.)

Solutions

Expert Solution

The effective annual rate for the credit card is calculated as:
Effective annual rate =[(1+Annual percentage rate/Number of compounding periods)^(Number of compounding periods)]-1

For the credit card, annual percentage rate (APR)=17% compounded monthly.
So, the number of compounding periods=12 per year
We will have effective annual rate=[(1+17%/12)^12]-1
=[(1+0.17/12)^12]-1
=[(1.014166667)^12]-1
=[1.183891733]-1
=0.183891733
This will be equal to 18.39% (rounded up to two decimal places)
The effective annual rate for the credit card=18.39%

The effective annual rate for the loan from parents is calculated as:

Rate of interest=10%
We won't divide the interest rate by 2 because we are already provided with the six-month rate. This interest rate is not the annual rate that is compounded​ semiannually.

Compounding periods=2 (in a year)
So, putting the value in the equation of effective annual rate, we get
So, effective annual rate= [(1+10%)^2]-1
=[(1.10)^2]-1
=[1.21]-1
=.21
This will be equal to 21%
So, the effective annual rate for the loan from parents=21%

The effective annual rate of the credit card is lower and is 18.39%.


Related Solutions

A healthy college student from Boston went to Colorado over Spring Break for a vacation. While...
A healthy college student from Boston went to Colorado over Spring Break for a vacation. While there, she drove to the top of Pike’s Peak, a tall mountain. During her first hour on the peak, she walked around, but had to sit and rest three times. The last time was in the weather station. She noticed the barometer in the station read 600 mm Hg (total Atm pressure). Explain two physiological responses that would increase the amount of oxygen delivered...
While on a skiing vacation, you break your leg and are treated by a local provider....
While on a skiing vacation, you break your leg and are treated by a local provider. Upon your return home, your PCP removes the cast. Explain why or why not to use a bundled code.
a) You went on spring vacation and missed school so you need to make up your...
a) You went on spring vacation and missed school so you need to make up your homework. You are missing 4 math assignments and 2 science assignments and 3 social studies assignments. What is the probability that the assignments from each class will be completed together (i.e. all of one class, then all of another class, then all of another class)? Round to 4 decimals. b) A family is planning on having 5 children. A baby food company told the...
since the reaction you will perform is reversible, give two ways you could push the equilibrium...
since the reaction you will perform is reversible, give two ways you could push the equilibrium in the forward direction in the laboratory.(LAB: Esterification: Preparation of Isoamyl Acetate)
Spring Break All Year Round is considering a new 3-year expansion project that requires an initial...
Spring Break All Year Round is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.5 million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $268,800 after 3 years. The project requires an initial investment in net working capital of $384,000. The project is estimated to generate $3,072,000 in annual sales, with costs of $1,228,800. The tax rate is 35 percent and the required return...
At Spring Break, you decide to take what you have learned in Business Statistics and apply...
At Spring Break, you decide to take what you have learned in Business Statistics and apply it in Las Vegas. You hit the roulette table and you bet on red each time. The probability of winning is approximately 0.47. You bet on red 5 times. Calculate the probability of losing at least 2 times. (Use Binomial Distribution)
Over Spring Break you shopped for a mortgage for your first house. You got a quote...
Over Spring Break you shopped for a mortgage for your first house. You got a quote from a bank with an effective annual rate of 4.0% on a 30-year mortgage, that will be paid back in monthly installments. The loan amount is $100,000. However, in order to receive this relatively low interest rate, the bank required that you pay 2-points during the origination of your loan (a point is 1% of your loan). With you paying this one-time fee at...
You are planning to take a spring break trip to Canada your senior year. The trip...
You are planning to take a spring break trip to Canada your senior year. The trip is exactly two years away, but you want to be prepared and have enough money when the time comes. Explain how you would determine the amount of money you will have to save in order to pay for the trip. 2. Identify the steps involved in computing the present value when you have multiple cash flows.
1. You are planning to take a spring break trip to Canada your senior year. The...
1. You are planning to take a spring break trip to Canada your senior year. The trip is exactly two years away, but you want to be prepared and have enough money when the time comes. Explain how you would determine the amount of money you will have to save in order to pay for the trip. 2. Identify the steps involved in computing the present value when you have multiple cash flows. **I hope for a non-repeated answer so...
1. You are planning to take a spring break trip to Canada your senior year. The...
1. You are planning to take a spring break trip to Canada your senior year. The trip is exactly two years away, but you want to be prepared and have enough money when the time comes. Explain how you would determine the amount of money you will have to save in order to pay for the trip. 2. Identify the steps involved in computing the present value when you have multiple cash flows.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT