FINAL REVIEW 1

FINAL REVIEW 1

RECALL APR AND CREDIT CARD INTEREST

• When you borrow money from a credit card company, it is repaid with interest

• Even though payments are made monthly, credit cards compound daily and accrue interest faster than regularly amortizing loans

• The minimum payment is a trap! It will not pay off a credit card balance in a reasonable amount of time.

• You should NEVER make less than the minimum payment -- it is the minimum amount a credit card company will accept without ruining your credit!

RECALL APR AND CREDIT CARD INTEREST Continued

• Annual Percentage Rate (APR) is the cost of credit expressed as a yearly interest rate

• A very good way to estimate interest due in a monthly payment of a credit card is to use this quick formula:

• I = Prt

• P = the average balance on your statement

• r = the APR expressed as a decimal

• t = 1/12

• The total amount due will be the average balance + interest (I)

EXAMPLE:

If you have a balance at the beginning of the month of $1,000 and an APR of 14.99% on your Visa card, how much will you owe in total by the end of the month? Round your answer to the nearest cent.

First, calculate the estimated interest (I) for the month

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Using P = $1000, r = .1499 and t = 1/12

The estimated interest I on this account will be:

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So the TOTAL amount due at the end of the billing cycle will be the average balance ($1,000) plus accrued interest:

ANNUITY AND AMORTIZATION REVIEW

• Amortization is made up of principle and interst

• Amortization is a type of annuity

• An ordinary annuity has regular payments made/deposited at the END of every compounding period

• Annuities are compounding accounts that have deposits made at regular intervals instead of a lump sum deposit

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Find the principal: The fixed payment is $700.00, the interest portion is $155.00

Multiple Choice

The fixed payment for a mortgaga is $1500.00. The original balance is $100,000. If the interest payment was $1125.00 and the principal payment was $375, what is the new balance on the loan?

• $98,875

• $98,500

• $99,625

Multiple Choice

If you paid $1,000 per month on a car loan for 5 years at a rate of 5.99%, how much did you pay in total by the end of the 5 years?

• $6,000

• $60,000

• $600,000

• none of the abov4e

ANNUITIES

• Use annuity formula

•  $A\ =\ Pymt\ \frac{\left(1+i\right)^{nt}-1}{i}$  
  

Multiple Choice

Find the future value of an annuity if you deposited $100 quarterly at an interest rate of 4.5% for three years: Round answer to nearest dollar

• $1,277

• $2,536

• $753,624

• $10,166