Chapter 14

Installment
Purchases:
Assignments

Prepared by Charlie Cook

The University of West Alabama

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 balance
credit card
effective interest rate
finance charge
fixed interest rate
installments
mortgage
Truth in Lending Act (TILA)
variable-rate loans
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TERMS

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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TERMS

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.

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TERMS

Computing Finance Charges

Title I of the Consumer Credit Protection Act of

1968 (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 and
Urban Development.

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Figure 14.1

Retail Statement of Account

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TERMS

Computing Costs of Installment Purchases

In a credit sale, the buyer pays the purchase price plus

credit charges and makes monthly payments (installments).

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TERMS

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.)

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EXAMPLE

Computing the Effective Interest Rate

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to Find the Monthly Payment of an Amortized Loan

Using Table 14-1

1. Divide the loan amount by $1,000 to get the

number of thousands of dollars.
2. Locate the amortization payment factor in
Table 14-1.
3. Multiply the quotient in Step 1 by the amortization
payment factor. The product is the amount of the
monthly payment.

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Figure 14.1

Amortization Payment FactorsAmount of Monthly

Payment per $1,000 Borrowed

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EXAMPLE

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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 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

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EXAMPLE

Finding the Monthly Payment of a Home Mortgage

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Assignment 14.1 Monthly Finance Charges

A

Problem 1: Change the rates from annual to monthly.

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Assignment 14.1 Monthly Finance Charges

A

Problem 1: Change the rates from annual to monthly.

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Assignment 14.1 Monthly Finance Charges

A

Problem 2: Change the rates from monthly to annual.

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Assignment 14.1 Monthly Finance Charges

A

Problem 2: Change the rates from monthly to annual.

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Assignment 14.1 Monthly Finance Charges

B

Lakeside Furniture Store offers the credit terms shown to its retail customers. In
problems 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 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.

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Assignment 14.1 Monthly Finance Charges

B

Lakeside Furniture Store offers the credit terms shown to its retail customers. In
problems 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 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.

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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 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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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 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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Assignment 14.1 Monthly Finance Charges

C

Devlins Feed & Fuel offers the credit terms shown to its retail customers. In problems 810 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.

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Assignment 14.1 Monthly Finance Charges

C

Devlins Feed & Fuel offers the credit terms shown to its retail customers. In problems 810 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.

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Assignment 14.1 Monthly Finance Charges

C

In problems 11 and 12 compute the missing values in Jimmy Petraseks charge account
summary 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 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.

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Assignment 14.1 Monthly Finance Charges

C

In problems 11 and 12 compute the missing values in Jimmy Petraseks charge account
summary 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 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.

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Assignment 14.2 Installment Sales and Effective Rates

A

Hal Layer needed to purchase office equipment costing $4,800. He was able to finance his
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.

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Assignment 14.2 Installment Sales and Effective Rates

A

Hal Layer needed to purchase office equipment costing $4,800. He was able to finance his
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.

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Assignment 14.2 Installment Sales and Effective Rates

A

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

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Assignment 14.2 Installment Sales and Effective Rates

A

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

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Assignment 14.2 Installment Sales and Effective Rates

A

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

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Assignment 14.2 Installment Sales and Effective Rates

A

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

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Assignment 14.2 Installment Sales and Effective Rates

B

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

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Assignment 14.2 Installment Sales and Effective Rates

B

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

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Assignment 14.2 Installment Sales and Effective Rates

B

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

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Assignment 14.2 Installment Sales and Effective Rates

B

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

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Assignment 14.3 Amortization and Mortgages

A

Lincoln 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.

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Assignment 14.3 Amortization and Mortgages

A

Lincoln 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.

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Assignment 14.3 Amortization and Mortgages

B

On April 13, Braunda Johannesen borrowed $6,000 from her bank to help her pay her
federal 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 interest
payment plus the unpaid balance. Complete the following amortization schedule.

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Assignment 14.3 Amortization and Mortgages

B

On April 13, Braunda Johannesen borrowed $6,000 from her bank to help her pay her
federal 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 interest
payment plus the unpaid balance. Complete the following amortization schedule.

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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 0.75%
(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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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 0.75%
(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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Assignment 14.3 Amortization and Mortgages

D

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

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Assignment 14.3 Amortization and Mortgages

D

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

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