A recent college graduate (Manny) has gotten into a little more debt than he had anticipated. He currently owes $22,000 on a Bank of America credit card. The card carries an 18% stated annual interest rate, but compounds monthly. Manny decides to make a concerted effort to rid himself of this debt obligation.
Part A: If Manny wishes to pay off his credit card bill in 5 years of equal monthly installments, promises to make the first payment next month and not use the credit card again, what monthly payments must he make? You may assume that there are no additional fees or charges related to the card, and that the credit card interest rate will not change.
Part B: Before committing to the above, Manny decides to discuss his situation with his parents. His parent’s being somewhat sympathetic, offer to extend Manny a loan to pay off the debt. They will give him $22,000 to pay off Bank of America, and then he will make monthly payments to his parents for 5 years. This loan is not free, as the parent’s offer comes with an interest rate of 8% per year, compounded monthly. Unfortunately, Manny has not completely learned his lesson, and with this offer from his parents he realizes there is an opportunity for some additional spending (that he won’t tell his parent’s about!). If Manny is willing to make the same total monthly payments over the next 5 years as he (you) calculated in Part A, what can he spend on a shopping spree today?