Question

You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of .5 percent per year, compounded monthly for the first six months, increasing thereafter to 16.8 percent compounded monthly. Assume you transfer the $5,800 balance from your existing credit card and make no subsequent payments. How much interest will you owe at the end of the first year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Amount of loan (present value) =5800

interest rate per month for first 6 month(i) = 0.5%/12 =0.0004166666667

number of introductory rate period (n) =6

Credit or loan amount at 6 month period (future value)= present value*(1+i)^n

=5800*(1+0.0004166666667)^6

=5814.515113

Now present value at 6 month time =5814.515113

interest rate per month for next 6 month(i) = 16.8%/12 =0.014

number of period (n) =6

future value = 5814.5151138*(1+0.014)^6

=6320.351528

Balance of loan at 1 year =6320.351528

loan amount = 5800

interest = balance at year end - credit amount

=6320.351528-5800

=520.35

So interst owed at first year end will be $520.35