Problem Set 3
1. Louise McIntyre s monthly gross income is $2,000. Her employer withholds $400 in federal, state, and local income taxes and $160 in Social Security taxes per month. Louise contributes $80 per month for her IRA. Her monthly credit payments for VISA, MasterCard, and Discover card are $35, $30, and $20, respectively. Her monthly payment on an automobile loan is $285. What is Louise s debt payments-to-income ratio? Is Louise living within her means?
2. Calculating Debt Payments to – Income Ratio. Suppose that your monthly net income is $2,400. Your monthly debt payments include your student loan payment, a gas credit card and they total $360. What is your debt payments to income ratio?
3. Dave borrowed $500 for one year and paid $50 in interest. The bank charged him a $5 service charge.
A- What is the finance charge on this loan?
B- Dave borrowed $500 on January 1, 2006, and paid it all back at once on December 31, 2006. What was the APR?
C- If Dave paid the $500 in 12 equal monthly payments, what is the APR?
4. Calculating Simple Interest on a Loan. Damon convinced his aunt to lend him $2,000 to purchase a plasma digital TV. She has agreed to charge only 6 % simple interest, and he has agreed to repay the loan at the end of one year. How much interest will he pay for the year?
5. After visiting several automobile dealerships, Richard Welch selects the car he wants. He likes its $10,000 price, but financing through the dealer is no bargain. He has $2,000 cash for a down payment, so he needs an $8,000 loan. In shopping at several banks for an installment loan, he learns that interest on most automobile loans is quoted at add-on rates. That is, during the life of the loan, interest is paid on the full amount borrowed even though a portion of the principal has been paid back. Richard borrows $8,000 for a period of four years at an add-on interest rate of 11 percent.
a. What is the total interest on Richard s loan?
b. What is the total cost of the car?
c. What is the monthly payment?
d. What is the annual percentage rate (APR)?