Question

Question 16

You owe $20,000 on your credit card. The credit card charges interest monthly and has an APR of 12.0%. You pay it off in 60 months. What is the principal payment for the first payment?

a. 254.89

b. 244.89

c. 250.23

d. 268.23

e. 256.54

Answer 1

The amount is computed as follows:

Present value = Monthly payment x [ (1 – 1 / (1 + r)ⁿ) / r ]

r will be as follows:

= 12% / 12

= 1% or 0.01

So, the monthly payment will be as follows:

$ 20,000 = Monthly payment x [ (1 - 1 / (1 + 0.01)⁶⁰ ) / 0.01 ]

$ 20,000 = Monthly payment x 44.95503841

Monthly payment = $ 20,000 / 44.95503841

Monthly payment = $ 444.8889537

So, the principal payment will be as follows:

= $ 444.8889537 - $ 20,000 x 0.01

= $ 444.8889537 - $ 200

= $ 244.89

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