Copyright © 2008, The McGraw-Hill Companies, Inc.
Topic Key Ideas, Formulas, and Techniques Examples
Installment Plan Payments, p. 449 • To fi nd payment, add the principal and
fi nance charge, then divide by the number of
payments.- Finance charge may be expressed as a
percent of the principal, called the carrying
charge. - Finance charge may be expressed as a simple
interest rate, calculated on the full principal for
the full term.
Tonya bought an electronic
piano for $1,850. She
fi nanced this purchase with
a $50 down payment and
a 2-year “simple interest
loan” at an 8% rate and
monthly payments. Find her
monthly payment amount.
(Example 10.3.2)Rule of 78, p. 450 • On a loan with n payments, the percent of the
total interest paid is (n k) divided by the sum
of the whole numbers from 1 to k.- The sum of the numbers from 1 to k is
k(k 1)/2. - To fi nd payoff, calculate the remaining
interest and subtract from the total remaining
payments.
Suppose that after
10 months, Tonya decides
to pay off her piano in full.
How much would she need
to pay off the loan at that
point? (Example 10.3.4)APR for Installment Loans, p. 452 • The “simple interest rate” for an installment
plan severely understates the actual interest
rate paid.- To fi nd the actual interest rate, set up an
amortization spreadsheet and guess-and-check
to fi nd the interest rate. Alternatively, use the
approximation formula: APR 2nr/(n 1).
Suppose that Bob’s Super
Rental World offers an
LCD television that would
normally sell for $375
on a 12-month rent-to-
own contract for $35.00
a month. If this were an
installment loan, what
would the interest rate be?
(Example 10.3.7)Lease Payments, p. 459 • The payment on a lease consists of two
pieces.- The payment on loss in value is the payment
of an annuity whose PV is the loss in value
over the lease’s term. - The interest on residual is simple interest on
the residual value.
Ajay is considering taking
out a 2-year lease on a
new car. The total price of
the car would be $23,850,
and the residual value
is $18,350. He owns a
car now, worth $4,800,
which he will trade in
when he gets his new
vehicle. Calculate his
lease payment, assuming
an 8.7% interest rate.
(Example 10.4.3)Mileage Limits and Penalties,
p. 461- Lease’s set limits on the maximum miles that
can be driven over the term of the lease. - Miles over the limit are subject to an overage
payment.
The terms of Ajay’s 2-year
lease allow for 12,500 miles
per year, with a 32 cent
per mile charge for any
overages. How much
will Ajay have to pay as
a penalty if at the end of
the lease his mileage is
(a) 16,500 miles, (b) 28,743
miles, or (c) 72,400 miles?
(Example 10.4.4)Chapter 10 Summary 467