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Unformatted text preview: 10% add‐on interest.
The amount of interest is $200
10% borrowed $200
20% $2,000
for 1 yr $1,000
for 1 yr $2,000 × 0.10 × 2 = $400
Now, if you pay back $2,000 + 400 at the end of two years, the annual interest rate is 10%. However, if you make a partial payment of $1200 at the end of first year and $1200 at the end of second year, your total paid back still the same, but you have now paid a higher rate. First year: the interest that you will pay is correct = 10%
Second year: the remain balance is 1000 but you pay $200 for interest, so the interest rate = 20% Not that since you did not owe $2,000 for 2 years, the interest rate, r, necessary to give $400 interest can be calculate using I = Prt
(2,000)r(1) + (1,000)r(1) = 400 Example: we considered the purchase of a computer with a price of $1399, paid for installments over 3 years at an add‐on rate of 15%. What is APR (rounded to the nearest tenth of a percent) 3,000r = 400
r = 400
= 0.13333 or 13.3%
3,000 This number, 13.3%, is called the annual percentage rate. …APR Formula… Solution When finding the APR. We only need to know N and r. Since N is the number of payments we have N = 12(3) = 36, and r is given as 0.15: APR = The annual percentage rate, or APR, is the rate pain on a loan when that rate is based on the actual amount owed for the length of time that it is owed. APR = 2Nr
N+1 2(36)(0.15)
≈ 0.292
36 + 1 The APR is 29.2%. r = an add‐on interest rate
N = payment Example: Consider a Honda Jazz with a price of $18,436 that is advertised at a monthly payment of $384 for 60 months. What is APR (to the nearest tenth of a percent)? 8.4 Compound Interest Solution Most bank do not pay interest according to the simple
interest formula; instead, after some period of time, they
add the interest to the principal and they pay interest on
this new, larger amount. When this is done, it is called
compound interest. Example: Compare simple and compound interest for a $1,000 deposit...
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This note was uploaded on 01/25/2014 for the course MATH ma 116 taught by Professor  during the Fall '11 term at Montgomery.
 Fall '11
 
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