Below You Will Find Two Problems In The Following Areas

Below You Will Find Two Problems In The Following Areas Openclosed

Below, you will find two problems in the following areas: Open/Closed End Credit, and Simple Interest. Solve both of these problems. You must show all steps and every single calculation. Thoroughly explain how and why you did each calculation with complete sentences. Include discussion relating the problem to your own personal experiences or to the real world.

Paper For Above instruction

Problem 1: Open/Closed End Credit

Credit card companies frequently use promotional rates to attract new customers, with the intention of converting them into long-term clients. For example, the Visa Student Card offers a 0% interest rate on purchases and balance transfers for the first six months. After this introductory period, the interest rate increases to an annual rate of 10.8%. However, if the customer makes a late payment or exceeds the credit limit, the rate may jump to a default rate of 24.8%. When considering switching to this card, it is essential to compare the costs associated with maintaining current credit and the potential risks and benefits of the promotional rate.

Suppose you currently have a credit card with an annual interest rate of 16.5%, and you typically carry a large outstanding balance of $5,000. To understand the financial impact, we will calculate the interest charges for both your current card and the Visa Student Card under different scenarios. For the current card, using the annual rate of 16.5%, the interest charge is calculated by multiplying the balance by the annual interest rate, after converting the percentage to decimal form. Specifically, the interest is:

Interest = Principal × Rate

Interest = $5,000 × 0.165 = $825

Thus, the annual interest charge on your current card is $825. This reflects the cost of carrying that balance over a year.

Next, for the Visa Student Card, with an annual interest rate of 10.8%, the interest would be:

Interest = $5,000 × 0.108 = $540

Switching to the Visa card could save you $285 annually in interest charges, assuming no late payments or exceeding the limit. However, if you miss a payment or go over your limit, the interest rate could increase to 24.8%, leading to a much higher interest charge:

Interest = $5,000 × 0.248 = $1,240

In deciding whether to switch, you should consider your ability to make timely payments and stay within your limit. If you are confident you will avoid late payments, switching to the Visa card could reduce your interest costs significantly. Conversely, if you are unsure about always paying on time, the risk of a higher interest rate could offset the potential savings.

Discussion: In my own experience, promotional rates can be a great way to save money if managed responsibly. However, the temptation of a lower rate might cause some to overlook the importance of timely payments, leading to higher costs if they slip up. It underscores the value of discipline in credit management and understanding the terms and conditions associated with promotional offers.

Problem 2: Simple Interest

Large appliance stores often offer simple interest loans to customers who cannot pay the full price upfront. Here’s an example: a customer wants to buy a refrigerator priced at $1,400. The store allows a $140 down payment and 12 monthly payments of $120.75. To understand the total cost of this loan, we need to analyze the down payment, the total payments, and the interest accrued.

Research a large appliance you'd like to purchase. Suppose you choose a $2,000 washing machine. The store offers a financing plan with a 10% down payment and a simple interest rate of 15%, payable over 12 months. First, calculate the down payment:

Down payment = 10% of $2,000 = 0.10 × $2,000 = $200

Remaining balance after down payment:

Remaining balance = $2,000 - $200 = $1,800

Next, the store charges simple interest on this remaining balance over the financing period. The simple interest formula is:

Interest = Principal × Rate × Time

Where Principal is the loan amount, Rate is the annual interest rate in decimal form, and Time is in years. Here, the principal is $1,800; the annual rate is 15% or 0.15; and the time is 1 year (since payments are spread over 12 months). Therefore:

Interest = $1,800 × 0.15 × 1 = $270

So, the total interest paid over the year is $270. The total amount to be repaid is:

Total repayment = Principal + Interest = $1,800 + $270 = $2,070

Since the customer is making 12 monthly payments, the monthly payment is:

Monthly payment = Total repayment / 12 = $2,070 / 12 ≈ $172.50

This means each month the customer pays approximately $172.50, including interest. This simple interest model shows how the total cost of financing can be significant, and understanding these calculations helps consumers make informed buying decisions based on affordability.

Discussion: In real-world purchases, understanding the interest calculation helps prevent surprises when the payment schedule and total cost are clarified. Personally, I find that shopping around for financing options and understanding the total cost including interest allows me to budget better and avoid high-interest debt. It also teaches the importance of paying more than the minimum to reduce interest costs over time.

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