Most major banks offer a credit card service for students. In 2011, Canadian credit card interest rates were in the range of 19.5 to 19.9 percent. Credit limits for student cards vary from $500 and up, depending on the type of card. Many have rewards programs that allow the cardholder, for example, to build up points toward free travel on the reward program airline. Annual fees depend on the features of the card. Basic cards have no annual fee; those with a richer feature set charge fees between $30 per year and $120 per year. The approval process for getting a card is relatively simple for university and college students so that they can start building a credit history and enjoy the convenience of having a credit card while still in school. The printed information does not use the term nominal or effective, nor does it define the compounding period. However, it is common in the credit card business for the annual interest rate to be divided into daily rates for billing purposes. Hence, the quoted annual rate of 19.7 percent is a nominal rate and the compounding period is daily. The actual effective interest rate is then (1 + 0.197/365)365 - 1 = 0.2177, or 21.77 percent. Discussion Interest information must be disclosed by law, but lenders and borrowers have some latitude as to how and where they disclose it. Moreover, there is a natural desire to make the interest rate look lower than it really is for borrowers, and higher than it really is for lenders. In the example of student credit cards, the effective interest rate is 21.77 percent, roughly 2 percent higher than the stated interest rate. The actual effective interest rate could even end up being higher if fees such as late fees, over-the-limit fees, and transaction fees are charged. Questions 1. Go to your local bank branch and find out the interest rate paid for various kinds of savings accounts, chequing accounts, and loans. For each interest rate quoted, determine if it is a nominal or effective rate. If it is nominal, determine the compounding period and calculate the effective interest rate. 2. Have a contest with your classmates to see who can find the organization that will lend money to a student like you at the cheapest effective interest rate, or that will take investments that provide a guaranteed return at the highest effective interest rate. The valid rates must be generally available, not tied to particular behavior by the client, and not secured to an asset (like a house). 3. If you borrowed $1000 at the best rate you could find and invested it at the best rate you could find, how much money would you make or lose in a year? Explain why the result of your calculation could not have the opposite sign.

Most major banks offer a credit card service for students. In 2011, Canadian credit card interest rates were in the range of 19.5 to 19.9 percent. Credit limits for student cards vary from $500 and up, depending on the type of card. Many have rewards programs that allow the cardholder, for example, to build up points toward free travel on the reward program airline. Annual fees depend on the features of the card. Basic cards have no annual fee; those with a richer feature set charge fees between $30 per year and $120 per year. The approval process for getting a card is relatively simple for university and college students so that they can start building a credit history and enjoy the convenience of having a credit card while still in school. The printed information does not use the term nominal or effective, nor does it define the compounding period. However, it is common in the credit card business for the annual interest rate to be divided into daily rates for billing purposes. Hence, the quoted annual rate of 19.7 percent is a nominal rate and the compounding period is daily. The actual effective interest rate is then (1 + 0.197/365)365 - 1 = 0.2177, or 21.77 percent. Discussion Interest information must be disclosed by law, but lenders and borrowers have some latitude as to how and where they disclose it. Moreover, there is a natural desire to make the interest rate look lower than it really is for borrowers, and higher than it really is for lenders. In the example of student credit cards, the effective interest rate is 21.77 percent, roughly 2 percent higher than the stated interest rate. The actual effective interest rate could even end up being higher if fees such as late fees, over-the-limit fees, and transaction fees are charged. Questions 1. Go to your local bank branch and find out the interest rate paid for various kinds of savings accounts, chequing accounts, and loans. For each interest rate quoted, determine if it is a nominal or effective rate. If it is nominal, determine the compounding period and calculate the effective interest rate. 2. Have a contest with your classmates to see who can find the organization that will lend money to a student like you at the cheapest effective interest rate, or that will take investments that provide a guaranteed return at the highest effective interest rate. The valid rates must be generally available, not tied to particular behavior by the client, and not secured to an asset (like a house). 3. If you borrowed $1000 at the best rate you could find and invested it at the best rate you could find, how much money would you make or lose in a year? Explain why the result of your calculation could not have the opposite sign.

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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Case Study (Student Credit Cards) Most major banks offer a credit card service for students. In 2011, Canadian credit card interest rates were in the range of 19.5 to 19.9 percent. Credit limits for student cards vary from $500 and up, depending on the type of card. Many have rewards programs that allow the cardholder, for example, to build up points toward free travel on the reward program airline. Annual fees depend on the features of the card. Basic cards have no annual fee; those with a richer feature set charge fees between $30 per year and $120 per year. The approval process for getting a card is relatively simple for university and college students so that they can start building a credit history and enjoy the convenience of having a credit card while still in school. The printed information does not use the term nominal or effective, nor does it define the compounding period. However, it is common in the credit card business for the annual interest rate to be divided into daily rates for billing purposes. Hence, the quoted annual rate of 19.7 percent is a nominal rate and the compounding period is daily. The actual effective interest rate is then (1 + 0.197/365)365 - 1 = 0.2177, or 21.77 percent. Discussion Interest information must be disclosed by law, but lenders and borrowers have some latitude as to how and where they disclose it. Moreover, there is a natural desire to make the interest rate look lower than it really is for borrowers, and higher than it really is for lenders. In the example of student credit cards, the effective interest rate is 21.77 percent, roughly 2 percent higher than the stated interest rate. The actual effective interest rate could even end up being higher if fees such as late fees, over-the-limit fees, and transaction fees are charged. Questions 1. Go to your local bank branch and find out the interest rate paid for various kinds of savings accounts, chequing accounts, and loans. For each interest rate quoted, determine if it is a nominal or effective rate. If it is nominal, determine the compounding period and calculate the effective interest rate. 2. Have a contest with your classmates to see who can find the organization that will lend money to a student like you at the cheapest effective interest rate, or that will take investments that provide a guaranteed return at the highest effective interest rate. The valid rates must be generally available, not tied to particular behavior by the client, and not secured to an asset (like a house). 3. If you borrowed $1000 at the best rate you could find and invested it at the best rate you could find, how much money would you make or lose in a year? Explain why the result of your calculation could not have the opposite sign.

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