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Module 11
Module 11
Module 11
Module 11
Module 11
Module 11
Single Sums of Money Suppose you deposit $2,000 in an individual retirement account (IRA) that

Single Sums of Money Suppose you deposit $2,000 in an individual

retirement account (IRA) that pays interest at 6% compounded monthly for the first two years and 9% compounded monthly for the next three

years. Determine the balance at the end of five

years.

the first two years and 9% compounded monthly for the next three years. Determine the balance
the first two years and 9% compounded monthly for the next three years. Determine the balance
the first two years and 9% compounded monthly for the next three years. Determine the balance
the first two years and 9% compounded monthly for the next three years. Determine the balance
 Commercial Loans  One of the most important applications of compound interest involves loans

Commercial Loans

One of the most important applications of compound interest involves loans that are paid off in installments over time. If the loan

is to be repaid in equal periodic amounts

(weekly, monthly, quarterly, or annually), it is said to be an amortized loan.

is to be repaid in equal periodic amounts (weekly, monthly, quarterly, or annually), it is said
is to be repaid in equal periodic amounts (weekly, monthly, quarterly, or annually), it is said
is to be repaid in equal periodic amounts (weekly, monthly, quarterly, or annually), it is said
is to be repaid in equal periodic amounts (weekly, monthly, quarterly, or annually), it is said
 The annual percentage rate (APR) is set by lenders, who are required to tell

The annual percentage rate (APR) is set by lenders, who are required to tell you what a

loan will actually cost per year, expressed as an APR. Some lenders charge lower interest, but add high fees; others do the reverse.

Combining the fees with a year of interest

charges to give you the true annual interest

rate, the APR allows you to compare these two kinds of loans on equal terms.

charges to give you the true annual interest rate, the APR allows you to compare these
charges to give you the true annual interest rate, the APR allows you to compare these
charges to give you the true annual interest rate, the APR allows you to compare these
charges to give you the true annual interest rate, the APR allows you to compare these
 Fees are the expenses the lender will charge to lend the money. The application

Fees are the expenses the lender will charge to lend the money. The application fee covers processing expenses. Attorney fees pay the lender’s attorney. Credit search fees cover researching your credit history. Origination

fees cover administrative costs and

sometimes appraisal fees. All these fees add up very quickly and can substantially increase the cost of your loan.

and sometimes appraisal fees. All these fees add up very quickly and can substantially increase the
and sometimes appraisal fees. All these fees add up very quickly and can substantially increase the
and sometimes appraisal fees. All these fees add up very quickly and can substantially increase the
and sometimes appraisal fees. All these fees add up very quickly and can substantially increase the
 Finance charges are the cost of borrowing. For most loans, they include all the

Finance charges are the cost of borrowing. For most loans, they include all the interest, fees, service charges, points, credit-related insurance premiums, and any other charges.

they include all the interest, fees, service charges, points, credit-related insurance premiums, and any other charges.
they include all the interest, fees, service charges, points, credit-related insurance premiums, and any other charges.
they include all the interest, fees, service charges, points, credit-related insurance premiums, and any other charges.
they include all the interest, fees, service charges, points, credit-related insurance premiums, and any other charges.
 The periodic interest rate is the interest the lender will charge on the amount

The periodic interest rate is the interest the lender will charge on the amount you borrow. If lender also charges fees, the periodic interest rate will not be the true interest rate.

The term of your loan is crucial in

determining its cost. Shorter terms mean

squeezing larger amounts into fewer payments. However, they also mean paying interest for fewer years, saving a lot of

money.

larger amounts into fewer payments. However, they also mean paying interest for fewer years, saving a
larger amounts into fewer payments. However, they also mean paying interest for fewer years, saving a
larger amounts into fewer payments. However, they also mean paying interest for fewer years, saving a
larger amounts into fewer payments. However, they also mean paying interest for fewer years, saving a
 Suppose you intend to own or lease a vehicle for 42 months. Consider the

Suppose you intend to own or lease a vehicle for 42 months. Consider the following three

ways of financing the vehiclesay, a 2006

BMW 325 Ci 2-D coupe:

Option A: Purchase the vehicle at the normal price of $32,508, and pay for the vehicle over

42 months with equal monthly payments at 5.65% APR financing.

Option B: Purchase the vehicle at a discount price of $31,020 to be paid immediately. Option C: Lease the vehicle for 42 months.

the vehicle at a discount price of $31,020 to be paid immediately.  Option C: Lease
the vehicle at a discount price of $31,020 to be paid immediately.  Option C: Lease
the vehicle at a discount price of $31,020 to be paid immediately.  Option C: Lease
the vehicle at a discount price of $31,020 to be paid immediately.  Option C: Lease

The

accompanying

chart

lists

the

items

of

interest under each option. For each option, license, title, and registration fees, as well as taxes and insurance, are extra. For the lease

option, the lessee must come up with $1,507.76

at signing. This cash due at signing includes the first month’s lease payment of $513.76 and a $994 administrative fee. The lease rate is based on 60,000 miles over the life of the contract.

There will be a surcharge at the rate of 18 cents

per mile for any additional miles driven over 60,000. No security deposit is required; however, a $395 disposition fee is due at the end of the

lease, at which time the lessee has the option to

purchase the car for $17,817. The lessee is also responsible for excessive wear and use.

 If the funds that would be used to purchase the vehicle are presently earning

If

the funds

that would be used

to purchase the

vehicle are presently earning 4.5% annual interest

compounded monthly, which financing option is a better choice?

the vehicle are presently earning 4.5% annual interest compounded monthly, which financing option is a better
the vehicle are presently earning 4.5% annual interest compounded monthly, which financing option is a better
the vehicle are presently earning 4.5% annual interest compounded monthly, which financing option is a better