Question

​Shirley, a recent college​ graduate, excitedly described to her older sister the ​$1,500 sofa, table, and chairs she found today.​ However, when asked she could not tell her sister which interest calculation method was to be used on her​ credit-based purchase. Calculate the monthly payments and total cost for a bank loan assuming a​one-year repayment period and 14 percent interest.​ Now, assume the store uses the​ add-on method of interest calculation. Calculate the monthly payment and total cost with a​ one-year repayment period and 12 percent interest. Using the information​ above, how much interest will Shirley​ "save" or be rebated if she can repay the loans after six​ months?

Answer 1

		One year repayment and 14% interest
	Pv	Amount of Purchase	$1,500
	Rate	Monthly interest=(14/12)%=	1.16667%
	Nper	Number of months of payment	12
	PMT	Monthly Payment	$134.68	(using PMT function of excelwith Rate=1.16667%,Nper=12, Pv=-15000)
		Excel command: PMT(1.16667%,12,-1500)
		Total Cost=134.68*12=	$1,616.17
		One year repayment and 12% interest
	Pv	Amount of Purchase	$1,500
	Rate	Monthly interest=(12/12)%=	1%
	Nper	Number of months of payment	12
	PMT	Monthly Payment	$133.27	(using PMT function of excelwith Rate=1%,Nper=12, Pv=-15000)
		Excel command: PMT(1%,12,-1500)
		Total Cost=133.27*12=	$1,599.28
		Future Value of repayment after 6 months	$819.88	(using FV function of excelwith Rate=1%,Nper=6, Pmt=-133.27)
		Excel Command: FV(1%,6,-133.27)
		Future Value of Loan after 6 months	$1,592.28	(using FV function of excelwith Rate=1%,Nper=6, Pv=-1500)
		Excel Command: FV(1%,6,,-1500)
		Amount to be paid at end of six months	$772.40	(1592.28-819.88)
		Payment during six months=133.27*6	$799.64
		Total Payment	$1,572.04
		Savings in interest =1616.17-1572.04	$44.13