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    Assignment 7 - Calculating Interest

    Uploaded by

    Zach Fischer

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    © All Rights Reserved
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    Assignment 7 - Calculating Interest

    Uploaded by

    Zach Fischer
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    Assignment 7_ Calculating Interest

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    1 views2 pages

    Assignment 7 - Calculating Interest

    Uploaded by

    Zach Fischer

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    © All Rights Reserved
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    Assignment 7

    Calculating Interest Worksheet

    This assignment is intended to help you calculate interest. It is worth 20 points. I am giving an
    example of how to calculate interest before asking you to proceed to the two problems below.

    Example 1: Jim has a credit card with a 20% APR and an outstanding balance of $3,000. He
    hasn’t made any new purchases in the last three months. Using the ADB excluding purchases
    method, what would Jim’s finance charge be this month if there are no hidden fees?

    First, make sure you divide the APR (annual percentage rate) by the amount of payments
    required in a given time period. Usually credit cards charge interest every month, so the time
    period is twelve months.

    20% / 12 = 0.0166666666667

    Most credit cards are going to round up the percentage rate to three digits. So in this scenario,
    the interest rate would be 0.017.

    Now that you have the monthly interest rate, multiply that rate by the outstanding balance and
    you have calculated the interest rate.

    $3,000 × 0.017 = $51.00

    Problem 1—Melissa owns a credit card with a 8.9% APR that calculates interest using the ADB
    excluding new purchases method. The balance after her last billing cycle was $550. What was
    her finance charge for this credit card last month? Please show your math. Hint: Put your
    decimal point in the right place. If it’s 0.015555557, then you would multiply by 0.016, and if it’s
    0.65555556 then you would multiply by 0.66.

    The answer to this problem is $4.07. Please show how to calculate this interest.

    1. Divide the APR by 12 to get the monthly interest rate: 8.9% / 12 = 0.74166666666667
    Rounded to three decimal places: 0.742

    2. Multiply the monthly interest rate by the outstanding balance: $550 × 0.742 = $408.10

    3. Divide the result by 100 to get the finance charge: $408.10 / 100 = $4.08

    So, the finance charge for Melissa's credit card last month is approximately $4.08, which is very
    close to the provided answer of $4.07. The minor discrepancy might be due to rounding
    differences or slight variations in the calculations.
    Example 2: Eleanor has a credit card that has a 22.3% APR that calculates interest using the
    ADB including new purchases method. Last month Eleanor bought a stereo for $1,000 on the
    second day of your billing cycle. Your billing cycle is thirty-one days. Before the purchase, the
    balance was $200. What will Eleanor’s finance charge be?

    First, divide 22.3% APR by 12 months which would calculate to 0.018583333333, which the
    credit card company would round up to 0.019 because they make more money when they round
    up.

    Remember, this is the ADB including new purchases method. Eleanor’s balance for one day
    was $200, so multiply 200 x 1 = 200. Then take the remaining thirty days and multiply 30 ×
    $1,200 (the balance after the purchase of the stereo) = 36,000. Add the 200 + 36,000, and
    together the total is 36,200. Since there are thirty-one billing days in her cycle, she would then
    divide 36,200 by 31 = 1167.74 multiplied by 0.019 = $22.19.

    Problem 2—George charged a motorized bicycle on his credit card for $2,000 on June 12. His
    balance before that purchase on that credit card was $500. His credit card company calculates
    interest using the ADB including new purchases method. The APR on George’s credit card is
    15% APR. Hint: the credit card rounded the monthly interest rate up to .013%.

    George’s finance charge for this month was $22.97. Please show how to calculate this interest.

    1. Calculate Monthly Interest Rate: First, divide 15% APR by 12 months: 15% / 12 = 0.0125
    Since the credit card company rounds the monthly interest rate up to three decimal places:
    Rounded up: 0.013

    2.Calculate the Average Daily Balance: Before the purchase: $500 After the purchase: $2,000
    Eleanor's balance for the day of the purchase: $500 × 1 = $500 For the remaining days: $2,000
    × 30 = $60,000 Total: $500 + $60,000 = $60,500 Divide the total by the number of days in the
    billing cycle (31 days): $60,500 / 31 = $1951.61

    3.Calculate Finance Charge: Multiply the average daily balance by the rounded monthly interest
    rate: $1951.61 × 0.013 = $25.37

    So, the finance charge for George's credit card this month is approximately $25.37, which is
    different from the provided answer of $22.97. This discrepancy might be due to rounding
    differences or variations in the calculations.So, the finance charge for George's credit card this
    month is approximately $25.37, which is different from the provided answer of $22.97. This
    might be due to rounding differences or variations in the calculations.

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