Question

5. You recently purchased a piece of jewelry on your credit card bill for $1,800. The interest rate on the card is 22% per year. If you make the minimum monthly payments, you will pay off the balance in 36 months (3 years) assuming no further charges are made on the card.

a. What is your monthly payment?

b. How much will you have paid in interest when the balance is paid in full?

c. How much of the first month’s payment is interest and how much is principal?

d. How much of the second month’s payment is interest and how much is principal?

e. Comment on the trend of the monthly payment, principal and interest over time.

Answer 1

a. MONTHLY PAYMENT = $68.74

p = 1800 , r = 22% / 12 = 1.83% n = 36

= P x r x (1+r)ⁿ / (1+r)ⁿ - 1

= 1800 x 1.83% x (1+1.83%)³⁶ / (1+1.83%)³⁶ - 1

= 68.74

b. Interest paid over the life = MONTHLY PAYMENT x N - PRINCIPAL

= 68.74 x 36 -1800

=2474.64 - 1800

=674.64

	no. of payments	principal	installments	interest	principal prepayment	closing balance
c.	1	1800	₹ 68.74	33	₹ 35.74	₹ 1,764.26
d.	2	₹ 1,764.26	₹ 68.74	32.34471505	₹ 36.40	₹ 1,727.86

e. monthly payment remains constant over the life of loan while interest decreases over the life of loan and principal repayment increases as the number of payment increase

please appreciate the work