PBP II Chapter 14 Installment Purchases

8/10/2019 PBP II Chapter 14 Installment Purchases

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Prepared by Charlie CookThe University of West Alabama

2009 South-Western, a part of Cengage Learning

InstallmentPurchases:Assignments

Chapter 14


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142 2009 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 balancecredit card

effective interest rate

finance charge

fixed interest rate

installments

mortgage

Truth in Lending Act (TILA)

variable-rate loans


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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.

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T E R M S


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Computing Simple Interest on a Monthly Basis

Rule: If the rate is annual, the time must be inyears; if the rate is monthly, the time must be inmonths.

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T E R M S


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Computing Finance Charges

Title I of the Consumer Credit Protection Act of1968 (CCPA)is known as the Truth in Lending Act(TILA).

Administered by the Federal Reserve Board.

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 andUrban Development.

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T E R M S


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Figure 14.1 Retail Statement of Account



Computing Costs of Installment Purchases

In a credit sale, the buyer pays the purchase price pluscredit charges and makes monthly payments (installments).

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T E R M S



Computing Effective Interest Rates

To calculate the effective interest rate, we use theformula, where Iis the amount of interest indollars, Tis the time of the loan in years, and Pisthe average unpaid balance (or the averageprincipal) over the period of the loan. The average

unpaid balanceis the sum of all of the unpaidmonthly balances divided by the number ofmonths.

(Note: The term effective interest rate is also u sed

in other contexts where a di f ferent formula is used

to find the effective rate.)

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T E R M S



Computing the Effective Interest Rate

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E X A M P L E


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to Find the Monthly Payment of an Amortized LoanUsing Table 14-1

1. Divide the loan amount by $1,000 to get thenumber of thousands of dollars.

2. Locate the amortization payment factor inTable 14-1.

3. Multiply the quotient in Step 1 by the amortizationpayment factor. The product is the amount of themonthly payment.

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Figure 14.1 Amortization Payment FactorsAmount of MonthlyPayment per $1,000 Borrowed


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E X A M P L E


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to Create an Amortization Schedule

For each row except the last:

1. Interest payment = Unpaid balance Monthly interest rate

2. Principal payment = Monthly paymentInterest payment

3. New unpaid balance = Old unpaid balancePrincipal 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

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Finding the Monthly Payment of a Home Mortgage

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E X A M P L E


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Assignment 14.1Monthly Finance Charges

A Problem 1: Change the rates from annual to monthly.


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A Problem 1: Change the rates from annual to monthly.


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A Problem 2: Change the rates from monthly to annual.


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A Problem 2: Change the rates from monthly to annual.


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B Lakeside Furniture Store offers the credit terms shown to its retail customers. Inproblems 35 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 daysafter the cycle-closing date. The finance charge, if any, is based upon the entire previous balance beforeany 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.


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B Lakeside Furniture Store offers the credit terms shown to its retail customers. Inproblems 35 compute the finance charge, if any, and the new balance. Assume that all

payments are made within the current billing cycle.



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B Lakeside Furniture Store offers the credit terms shown to its retail customers. Assumethat all payments are made within the current billing cycle.


In problems 6 and 7, Lelia McDaniel has an account at Lakeside Furniture Store. Compute the missingvalues in Lelias account summary for the months of August and September. The previous balance in

September is the same as the new balance in August.


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B Lakeside Furniture Store offers the credit terms shown to its retail customers. Assumethat all payments are made within the current billing cycle.


In problems 6 and 7, Lelia McDaniel has an account at Lakeside Furniture Store. Compute the missingvalues in Lelias account summary for the months of August and September. The previous balance in

September is the same as the new balance in August.


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C Devlins Feed & Fuel offers the credit terms shown to its retail customers. In problems 8-10 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 Balanceequals Previous Balance less Payments and Credits. In either case, the monthly rate is 1.25% on the first $500and 1% on any amount over $500. These are annual percentage rates of 15% and 12%, respectively.


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C Devlins Feed & Fuel offers the credit terms shown to its retail customers. In problems 8-10 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 Balanceequals Previous Balance less Payments and Credits. In either case, the monthly rate is 1.25% on the first $500and 1% on any amount over $500. These are annual percentage rates of 15% and 12%, respectively.


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C In problems 11 and 12 compute the missing values in Jimmy Petraseks charge accountsummary at Devlins for the months of June and July. The previous balance in July is the

same as the new balance in June.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 Balanceequals Previous Balance less Payments and Credits. In either case, the monthly rate is 1.25% on the first $500and 1% on any amount over $500. These are annual percentage rates of 15% and 12%, respectively.


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C In problems 11 and 12 compute the missing values in Jimmy Petraseks charge accountsummary at Devlins for the months of June and July. The previous balance in July is the

same as the new balance in June.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 Balanceequals Previous Balance less Payments and Credits. In either case, the monthly rate is 1.25% on the first $500and 1% on any amount over $500. These are annual percentage rates of 15% and 12%, respectively.


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Assignment 14.2Installment Sales and Effective Rates

A Hal Layer needed to purchase office equipment costing $4,800. He was able to finance hispurchase over 3 months at a 9% annual interest rate. Following are three different

payment options under these conditions. Complete the installment purchase table foreach payment option.


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A Hal Layer needed to purchase office equipment costing $4,800. He was able to finance hispurchase over 3 months at a 9% annual interest rate. Following are three different

payment options under these conditions. Complete the installment purchase table foreach payment option.


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A Hal Layer needed to purchase office equipment costing $4,800. He was able to finance hispurchase over 3 months at a 9% annual interest rate.


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B For each of the following problems calculate the effective rate using the formula


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Assignment 14.3Amortization and Mortgages

A Lincoln Lending Corp. amortizes all of its mortgage loans and many of its personal loanson 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 eachloan. Then compute the monthly payment.


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A Lincoln Lending Corp. amortizes all of its mortgage loans and many of its personal loanson 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 eachloan. Then compute the monthly payment.


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B On April 13, Braunda Johannesen borrowed $6,000 from her bank to help her pay herfederal income taxes for the previous year. The bank amortized her loan over 4 months at

an annual rate of 9%. Braunda paid interest of 0.75% of the unpaid balance each month.Find the amortization payment factor in Table 14-1. This factor makes a total payment of$1,528.23 each month except the last. For the last month, the total payment is the interestpayment plus the unpaid balance. Complete the following amortization schedule.

A i 14 3 A i i d M


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B On April 13, Braunda Johannesen borrowed $6,000 from her bank to help her pay herfederal income taxes for the previous year. The bank amortized her loan over 4 months at

an annual rate of 9%. Braunda paid interest of 0.75% of the unpaid balance each month.Find the amortization payment factor in Table 14-1. This factor makes a total payment of$1,528.23 each month except the last. For the last month, the total payment is the interestpayment plus the unpaid balance. Complete the following amortization schedule.

A i t 14 3 A ti ti d M t


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C Refer to Part B, in which Braunda Johannesen borrowed $6,000 to help pay her federalincome 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 0.75%(9%/12) each month and 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.



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C Refer to Part B, in which Braunda Johannesen borrowed $6,000 to help pay her federalincome taxes. Now suppose that Braunda agreed to make payments of $1,200 in months1, 2, and 3. The bank will compute the interest on the unpaid balance at a rate of 0.75%(9%/12) each month and 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.



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D Mr. and Mrs. Paul Yeiter sold their previous home and used the profits as a down paymentto buy a new home. They took out a $160,000, 25-year mortgage from Colonial HomeFinance. The mortgage had an annual interest rate of 6%. From Table 14-1, theamortization payment factor is $6.44301 and the monthly payment is $1,030.88. Completethe first three rows of the amortization schedule for the Yeiters mortgage.



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D Mr. and Mrs. Paul Yeiter sold their previous home and used the profits as a down paymentto buy a new home. They took out a $160,000, 25-year mortgage from Colonial HomeFinance. The mortgage had an annual interest rate of 6%. From Table 14-1, theamortization payment factor is $6.44301 and the monthly payment is $1,030.88. Completethe first three rows of the amortization schedule for the Yeiters mortgage.

PBP II Chapter 14 Installment Purchases

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