Question
You would really like to take a vacation trip after the 6-week summer session. Unfortunately, you are broke. You receive in the mail an offer
You would really like to take a vacation trip after the 6-week summer session. Unfortunately, you are broke. You receive in the mail an offer of a credit card that allows you to obtain an immediate $1000 loan. The minimum payments are only $20 a month. You decide that you can afford $20 a month, so you accept the credit card companys offer to loan you $1000. The card charges 18% nominal interest per year, compounded monthly. Assume you take out the loan today and pay $20 a month starting one month from today.
a. How much of the first $20 payment is interest? Where does the remaining go? b. If you continue to pay $20 a month, how many months will it take before the loan is paid off? Express your answer to the nearest multiple of 12 months. c. What is the effective annual interest rate? d. Your parents are concerned about your spending patterns, and they plan to review your financial situation one year from now (after 12 payments on your loan). How much will you still owe after 12 months if you make the $20 per month payments? e. If you were making $10 payments, twice a month, how much would you owe at the end of the first year? How long would it take to repay the loan?
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