Prepared by Johnny Howard © 2015 South-Western, a part of Cengage Learning

14–2 © 2015 South-Western, a part of Cengage Learning

14–3 © 2015 South-Western, a part of Cengage Learning Converting Interest Rates Rule:To convert an annual rate to a monthly rate, divide the annual rate by 12. Rule:To convert a monthly rate to an annual rate, multiply the monthly rate by 12. T E R M S 1

14–4 © 2015 South-Western, a part of Cengage Learning Computing Simple Interest on a Monthly Basis Rule: If the rate is annual, the time must be in years; if the rate is monthly, the time must be in months. T E R M S 2

14–5 © 2015 South-Western, a part of Cengage Learning Consumer Protection Acts Title I of the Consumer Credit Protection Act of 1968 (CCPA) —the Truth in Lending Act (TILA). Administered by the Federal Reserve System. Required lenders to disclose: 1.The total of all finance charges, including interest, carrying charges, insurance, and special fees 2.The annual percentage rate (APR) of the total finance charge 3.The method by which they compute the finance charge T E R M S 3

14–6 © 2015 South-Western, a part of Cengage Learning Consumer Protection Acts Consumer Leasing Act of 1976 Administered by the Federal Trade Commission Home Ownership and Equity Protection Act of 1994 Administered by the Department of Housing and Urban Development. Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank bill) Established the Consumer Financial Protection Bureau (CFPB) T E R M S 3

14–7 © 2015 South-Western, a part of Cengage Learning Methods of Calculating Finance Charges 1.The finance charge may be based on the amount owed at the beginning of the current month, ignoring payments and purchases. 2.The finance charge may be based on the amount owed at the beginning of the month, after subtracting any payments during the month and ignoring purchases. 3.The finance charge may be based on the average daily balance. (Add the unpaid balance each day; divide the total by the number of days in the month.) Payments are usually included; new purchases may or may not be included. 4.A variation of the average daily balance method is to compute the interest charge each day, on a daily basis, and then add all the daily interest charges for the month. T E R M S 3

14–8 © 2015 South-Western, a part of Cengage Learning Figure 14.1Retail Statement of Account

14–9 © 2015 South-Western, a part of Cengage Learning

14–10 © 2015 South-Western, a part of Cengage Learning Computing Costs of Installment Purchases In a credit sale, the buyer pays the purchase price plus credit charges and makes monthly payments (installments). T E R M S 4

14–11 © 2015 South-Western, a part of Cengage Learning Computing Costs of Installment Purchases In a credit sale, the buyer pays the purchase price plus credit charges and makes monthly payments (installments). T E R M S 4

14–12 © 2015 South-Western, a part of Cengage Learning Computing Effective Interest Rates To calculate the effective interest rate, we use the formula, where I is the amount of interest in dollars, T is the time of the loan in years, and P is the average unpaid balance (or the average principal) over the period of the loan. The average unpaid balance is the sum of all of the unpaid monthly balances divided by the number of months. (Note: The term effective interest rate is also used in other contexts where a different formula is used to find the effective rate.) T E R M S 5

14–13 © 2015 South-Western, a part of Cengage Learning Computing the Effective Interest Rate E X A M P L E 5

14–14 © 2015 South-Western, a part of Cengage Learning to Find the Monthly Payment of an Amortized Loan Using Table Divide the loan amount by $1,000 to get the number of thousands of dollars. 2.Locate the amortization payment factor in Table Multiply the quotient in Step 1 by the amortization payment factor. The product is the amount of the monthly payment. 6

14–15 © 2015 South-Western, a part of Cengage Learning Figure 14.1Amortization Payment Factors—Amount of Monthly Payment per $1,000 Borrowed

14–16 © 2012 South-Western, a part of Cengage Learning

14–17 © 2015 South-Western, a part of Cengage Learning

14–18 © 2015 South-Western, a part of Cengage Learning to Create an Amortization Schedule For each row except the last: 1.Interest payment = Unpaid balance × Monthly interest rate 2.Principal payment = Monthly payment – Interest payment 3.New unpaid balance = Old unpaid balance – Principal payment For the last row (the final payment): 1.Interest payment = Unpaid balance × Monthly interest rate 2.Monthly payment = Unpaid balance + Interest payment 3.Principal payment = Unpaid balance 6

14–19 © 2015 South-Western, a part of Cengage Learning

14–20 © 2015 South-Western, a part of Cengage Learning Finding the Monthly Payment of a Home Mortgage E X A M P L E 7

14–21 © 2015 South-Western, a part of Cengage Learning

14–22 © 2015 South-Western, a part of Cengage Learning Chapter Terms for Review amortization amortization payment factor amortization schedule annual percentage rate (APR) average daily balance average principal average unpaid balance credit card effective interest rate finance charge fixed interest rate installments mortgage Truth in Lending Act (TILA) variable-rate loans

14–23 © 2015 South-Western, a part of Cengage Learning Assignment 14.1 Monthly Finance Charges A Problem 1: Change the rates from annual to monthly.

14–24 © 2015 South-Western, a part of Cengage Learning Assignment 14.1 Monthly Finance Charges A Problem 2: Change the rates from monthly to annual.

14–25 © 2015 South-Western, a part of Cengage Learning Assignment 14.1 Monthly Finance Charges B Lakeside Furniture Store offers the credit terms shown to its retail customers. In problems 3–5 compute the finance charge, if any, and the new balance. Assume that all payments are made within the current billing cycle. TERMS: There will be no finance charge if the full amount of the new balance is received within 25 days after the cycle-closing date. The finance charge, if any, is based upon the entire previous balance before any payments or credits are deducted. The rates are 1.5% per month on amounts up to $1,000 and 1.25% on amounts in excess of $1,000. These are annual percentage rates of 18% and 15%, respectively.

14–26 © 2015 South-Western, a part of Cengage Learning Assignment 14.1 Monthly Finance Charges B Lakeside Furniture Store offers the credit terms shown to its retail customers. Assume that all payments are made within the current billing cycle. TERMS: There will be no finance charge if the full amount of the new balance is received within 25 days after the cycle-closing date. The finance charge, if any, is based upon the entire previous balance before any payments or credits are deducted. The rates are 1.5% per month on amounts up to $1,000 and 1.25% on amounts in excess of $1,000. These are annual percentage rates of 18% and 15%, respectively. In problems 6 and 7, Lelia McDaniel has an account at Lakeside Furniture Store. Compute the missing values in Lelia’s account summary for the months of August and September. The previous balance in September is the same as the new balance in August.

14–27 © 2015 South-Western, a part of Cengage Learning Assignment 14.1 Monthly Finance Charges C Bracelin’s Feed & Fuel offers the credit terms shown to its retail customers. In problems 8-12 compute the missing values in the charge accounts shown. Assume that all payments are made within 30 days of the billing date. TERMS: Finance Charge is based on the Net Balance, if payment is received within 30 days of the billing date. If payment is made after 30 days, then the Finance Charge is based on the Previous Balance. Net Balance equals Previous Balance less Payments and Credits. In either case, the monthly rate is 1.25% on the first $500 and 1% on any amount over $500. These are annual percentage rates of 15% and 12%, respectively.

14–28 © 2015 South-Western, a part of Cengage Learning Assignment 14.1 Monthly Finance Charges C In problems 11 and 12 compute the missing values in Les Golbeck’s charge account summary at Bracelin’s for the months of September and October. The previous balance in October is the same as the new balance in September. TERMS: Finance Charge is based on the Net Balance, if payment is received within 30 days of the billing date. If payment is made after 30 days, then the Finance Charge is based on the Previous Balance. Net Balance equals Previous Balance less Payments and Credits. In either case, the monthly rate is 1.25% on the first $500 and 1% on any amount over $500. These are annual percentage rates of 15% and 12%, respectively.

14–29 © 2015 South-Western, a part of Cengage Learning Assignment 14.2 Installment Sales and Effective Rates A Jo Jensen needed to purchase office equipment costing $4,800. She was able to finance her purchase over 3 months at a 9% annual interest rate. Following are three different payment options under these conditions. Complete the installment purchase table for each payment option.

14–30 © 2015 South-Western, a part of Cengage Learning Assignment 14.2 Installment Sales and Effective Rates

14–31 © 2015 South-Western, a part of Cengage Learning Assignment 14.2 Installment Sales and Effective Rates B For each of the following problems calculate the effective rate using the formula

14–32 © 2015 South-Western, a part of Cengage Learning Assignment 14.2 Installment Sales and Effective Rates B For each of the following problems calculate the effective rate using the formula

14–33 © 2015 South-Western, a part of Cengage Learning Assignment 14.3 Amortization and Mortgages A Reedsport Lending Corp. amortizes all of its mortgage loans and many of its personal loans on a monthly basis. The total monthly payments are equal each month and include both interest and principal. Use Table 14-1 to find the amortization payment factor for each loan. Then compute the monthly payment.

14–34 © 2015 South-Western, a part of Cengage Learning Assignment 14.3 Amortization and Mortgages B On April 13, Braunda Johannesen borrowed $6,000 from her bank to help pay her federal income taxes for the previous year. The bank amortized her loan over 4 months at an annual rate of 7.2%. Braunda paid interest of 0.6% on the unpaid balance each month. Find the amortization payment factor in Table This factor makes a total payment of $1, each month except the last. For the last month, the total payment is the interest payment plus the unpaid balance. Complete the following amortization schedule.. Complete the following amortization schedule.

14–35 © 2015 South-Western, a part of Cengage Learning Assignment 14.3 Amortization and Mortgages C Refer to part B, in which Braunda Johannesen borrowed $6,000 to help pay her federal income taxes. Now suppose that Braunda agreed to make payments of $1,200 in months 1, 2, and 3. The bank will compute the interest on the unpaid balance at a rate of 0.6% (7.2%/12) each month and will deduct the interest from the $1,200. In the last (fourth) month, Braunda will pay all of the remaining unpaid balance plus the interest for the last month. Complete the table, using the same procedure as in part B.

14–36 © 2015 South-Western, a part of Cengage Learning Assignment 14.3 Amortization and Mortgages D Mr. and Mrs. Jay Wilson sold their previous home and used the profits as a down payment to buy a new home. They took out a $180,000, 20-year mortgage from Aptos Home Finance. The mortgage had an annual interest rate of 4.8%. From Table 14-1, the amortization payment factor is $ and the monthly payment is $1, Complete the first three rows of the amortization schedule for the Wilsons’ mortgage.