Question

You have been pricing a compact disk player in several stores. Three stores have the identical price of $700. Each store charges 12 percent APR, has a 30-day grace period, and sends out bills on the first of the month. On further investigation, you find that store A calculates the finance charge by using the average daily balance method, store B uses the adjusted balance method, and store C uses the previous balance method. Assume you purchased the disk player on May 5 and made a $100 payment on June 15.

What will the finance charge be (for June) if you made your purchase from store A? From store B? From store C? (Do not round your intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

Answer:-

Store A

Average Daily Balance Finance Charge

($700+$200/2=$450) ($450*0.01,=$4.5)

Store B

Adjusted Balance Method Finance Charges

($700-$100=$600) ($600*0.01=$6)

Store C

Previous Balance Method Finance Charges

($700-$0=$700) ($700*0.01=$7)

Remember, Store C does not count the amount you paid during the month and charges interest for the entire month on the beginning balance of $700. Note, too that 12 percent APR is equivalent to 1 percent monthly rate. The entire benefit of a grace period disappears whenyou carry a balance from one month to next.