Discussion:
Question #1 - Simple Interest
Carmen needed to borrow money in order to buy a car so that she could commute to the local university. She saved $1,500, but when she started shopping she realized that $1,500 would not get her the car she needed. She found a used car she liked with a cost $6,000, and a bank offered her a loan of $4,500 with simple interest terms of 6% annual interest and an 18-month term. She also inquired at the university credit union and found that they offered terms of 5% on a 2-year loan of $4,500. Carmen's loan at both institutions was structured as an installment loan.
a. Calculate the finance charge (interest), the total installment price, and the monthly payment for the bank loan.
b. Calculate the finance charge (interest), the total installment price, and the monthly payment for the credit union loan.
c. Which loan is going cost Carmen more in terms of finance charge? Aside from the finance charge consideration, what other factors might influence Carmen's choice of loan?
Question #2 - Compound Interest
Devon bought snow sailing equipment for $1,800. He borrowed money from his credit union for the purchase, obtaining a loan with a 7% annual interest rate, monthly compounding, and a 2-year term. If Devon's loan is structured as an installment loan, calculate his total installment cost and his total finance charge (interest)
Question #3 - Annuity Payment
Eric is saving money for a down payment on an expensive Patek Phillipe watch. He needs $20,000 in five years to make his down payment and is investing in an annuity yielding an annual interest rate of 8% compounded quarterly. If the annuity requires that Eric make quarterly investments, what annuity payment must Eric make to save enough for his watch down payment?