**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.**

Questions

**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)?**