Imagine that two friends, Yan and Caden, each buy an iPod touch for $240, and pay with a credit card. When this happens, the credit card company pays Apple, and the friends become indebted to the credit card company. For every year they don't pay back the debt, the company charges them interest: a percentage of what they owe. The interest rate is called an annual percentage rate (APR), while the amount owed is called a balance. Calculate how much each person would owe over time if neither made any payments to the credit card company, assuming interest is calculated once per year.
Imagine that two friends, Yan and Caden, each buy an iPod touch for $240, and pay with a credit card. When this happens, the credit card company pays Apple, and the friends become indebted to the credit card company. For every year they don't pay back the debt, the company charges them interest: a percentage of what they owe. The interest rate is called an annual percentage rate (APR), while the amount owed is called a balance. Calculate how much each person would owe over time if neither made any payments to the credit card company, assuming interest is calculated once per year.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Imagine that two friends, Yan and Caden, each buy an iPod touch for $240, and pay with a credit card.
When this happens, the credit card company pays Apple, and the friends become indebted to the credit
card company. For every year they don't pay back the debt, the company charges them interest: a
percentage of what they owe. The interest rate is called an annual percentage rate (APR), while the
amount owed is called a balance.
Calculate how much each person would owe over time if neither made any payments to the credit card
company, assuming interest is calculated once per year.
Balance after...
Person APR 0 years
Yan
18% 240
Caden 36%
1 years
283.2
2 years
334.176
3 years
Balance after...
Person APR 0 years 1 years
Yan
18%
394.327
6 years
465.30
In reality, credit card companies don't charge interest every year, they charge interest every month. To
determine the monthly interest rate, divide the APR by 12.
Yan has an annual rate of 18%. So Yan has a monthly rate of
Caden has an annual rate of 36%. So Caden B has a monthly rate of
Given that both Yan and Caden charge $240 initially calculate how much each person would owe over time
if neither made any payments to the credit card company, assuming interest is compounded monthly.
%
2 years 3 years 6 years
Transcribed Image Text:Balance after...
Person APR 0 years 1 years 2 years
Yan 18%
Caden 36%
3 years 6 years
Do you think it matters how often credit card companies charge interest? Explain.
Yes it matters because the more often they calculate the interest the higher the amount goes.
O No, you pay the same amount of interest regardless of how often they calculate it.
If neither friend made any payments for 11 years, how much would the $240 iPod end up costing in total
(with monthly compounding)?
Yan's total cost (balance after 11 years): $
Caden's total cost (balance after 11 years): $
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