Imagine that two friends, Zari and Salomé, each buy an iPod touch for $300, 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 Zari 6% 300 Salomé 30% 300 Person APR Zari Balance after... 0 years 6% 300 1 years 318 Salomé 30% 300 390 08 2 years 337.08 507 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. Zari has an annual rate of 6%. So Zari has a monthly rate of 0.5 1 years 319.50 x Salomé has an annual rate of 30%. So Salomé B has a monthly rate of 2.5 Given that both Zari and Salomé charge $300 initially calculate how much each person would owe over time if neither made any payments to the credit card company, assuming interest is compounded monthl 2 years 339.14 X 413.19 X 568.47 X 3 years 357.45 Salomé's total cost (balance after 11 years): $ 6,487.85 659.10 3 years 359.03 X X 0 % 6 years 780.03 X 427.80 X 0 1,442.06 X Do you think it matters how often credit card companies charge interest? Explain. No, you pay the same amount of interest regardless of how often they calculate it. Yes it matters because the more often they calculate the interest the higher the amount goes. 6 years 420.27 X If neither friend made any payments for 11 years, how much would the $300 iPod end up costing in total (with monthly compounding)? Zari's total cost (balance after 11 years): $494.65 1,995.49 X
Imagine that two friends, Zari and Salomé, each buy an iPod touch for $300, 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 Zari 6% 300 Salomé 30% 300 Person APR Zari Balance after... 0 years 6% 300 1 years 318 Salomé 30% 300 390 08 2 years 337.08 507 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. Zari has an annual rate of 6%. So Zari has a monthly rate of 0.5 1 years 319.50 x Salomé has an annual rate of 30%. So Salomé B has a monthly rate of 2.5 Given that both Zari and Salomé charge $300 initially calculate how much each person would owe over time if neither made any payments to the credit card company, assuming interest is compounded monthl 2 years 339.14 X 413.19 X 568.47 X 3 years 357.45 Salomé's total cost (balance after 11 years): $ 6,487.85 659.10 3 years 359.03 X X 0 % 6 years 780.03 X 427.80 X 0 1,442.06 X Do you think it matters how often credit card companies charge interest? Explain. No, you pay the same amount of interest regardless of how often they calculate it. Yes it matters because the more often they calculate the interest the higher the amount goes. 6 years 420.27 X If neither friend made any payments for 11 years, how much would the $300 iPod end up costing in total (with monthly compounding)? Zari's total cost (balance after 11 years): $494.65 1,995.49 X
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
Related questions
Question
Ive gotten some of them right but the rest are wrong. Please give me the answer for them so I can look over it
Transcribed Image Text:Imagine that two friends, Zari and Salomé, each buy an iPod touch for $300, 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.
Person APR
Zari
6%
Salomé 30% 300
Balance after...
0 years
300
Zari
Salomé 30%
Person APR 0 years
6% 300
O
08 318
1 years
Balance after...
300
390
Salomé has an annual rate of 30%. So Salomé B has a monthly rate of 2.5
o
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.
Zari has an annual rate of 6%. So Zari has a monthly rate of 0.5
2 years
337.08
1 years
or 507
319.50 X
Given that both Zari and Salomé charge $300 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.
413.19 X
08
2 years
339.14 X
08 659.10
3 years
357.45
3 years
359.03
568.47 X 780.03
Salomé's total cost (balance after 11 years): $ 6,487.85
0 %
0
os
08 %
6 years
427.80 X
1,442.06 X
6 years
420.27 x
Do you think it matters how often credit card companies charge interest? Explain.
O No, you pay the same amount of interest regardless of how often they calculate it.
Yes it matters because the more often they calculate the interest the higher the amount goes.
1,995.49 X
If neither friend made any payments for 11 years, how much would the $300 iPod end up costing in total
(with monthly compounding)?
Zari's total cost (balance after 11 years): $494.65
Expert Solution
Step 1
The money's time worth reveals that any current amount is worth more as compared to its worth in the future. The rationale behind this principle is the fact that any sum today can be infused into multiple investment alternatives and these investments earn interest and the sum grows overtime. The process of paying/charging interest on previously credited interest is regarded as compounding.
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