Lecture no13 debt management

Debt Management Lecture No 13 Chapter Contemporary Engineering Economics Copyright © 2016 th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Credit Card Debt Management Credit card debt and commercial loans are among the most significant financial transactions involving interest th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Example 4.14: Loan Balance, Principal, and Interest  Given: o P = $5,000, o i = 12% APR, o N = 24 months  Find: A th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Solution  Monthly Payment: A = $5,000(A/P, 1%, 24) = $235.37 th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Calculating the Remaining Loan Balance after Making the nth Payment th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Example 4.15: Loan Balance at End of Period Given: P = $5,000, i = 12% APR, N = 24 months  Find: Loan balance, principal, and interest payment for the th payment th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Solution   Monthly payment: $235.37 Interest payment at n = • Loan balance at the end of n = 5, or beginning of n = B5 = $235.37(P / A,1%,19) • = $4,054.44 Interest payment I6 = ∃4,054.49(0.01) • = ∃40.54 Principal payment P6 = $235.37 − $40.54 = $194.83 th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Example 4.17: Financing Your Vehicle Given: • Three financing options • r = 4.5% • Payment period = monthly • Compounding period = monthly  Find: Which option is best? th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Solution •Option A: Conventional Debt Financing: Pdebt = $4,500 + $736.53(P/A, 4.5%/12, 42) − $17,817(P/F, 4.5%/12, 42) = $17,847 •Option B: Cash Financing Pcash = $31,020 − $17,817(P/F,4.5%/12,42) = $15,845 •Option C: Lease Financing 42) Please = $1,507.76 + $513.76(P/A, 4.5%/12, + $395(P/F, 4.5%/12, 42) = $21,336 th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Home Mortgage Types of Home Mortgages The Cost of a Mortgage Fixed-rate mortgage Loan amount Adjustable-rate mortgage Loan term Hybrid mortgage Payment frequency Points (prepaid interest) Fees Types of mortgages th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Example 4.16: An Interest-Only Versus a Fully Amortized Mortgage  Given: • P = $200,000, • APR = 6.6% or 0.55% per month, and • N = 30 years  Find: (a) monthly payment; (b) interest payments during the first year of ownership of the home • Option 1: A fully amortized payment option • Option 2: A five-year interest-only option th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Solution • (a) Monthly payments th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Solution • (b) Interest payments th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Calculating the Monthly Payments with an Adjustable-Rate Mortgage (ARMs) • Index: a guide that lenders use to measure interest rate changes • Margin: an interest rate that represents the lender’s cost of doing business plus the profit • Adjustment period: the period between potential interest rate adjustments (e.g., 3/1 means your interest rate is fixed for the first years, then could be adjusted every year thereafter) • Interest rate cap: a limit on the amount your interest can change (a periodic cap and a lifetime cap) • Payment cap: how much your monthly payment can increase at each adjustment th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Example 4.18: A 5/1 Hybrid Adjustable Mortgage Plan  Given: Varying annual mortgage rates and N = 30 years  Find: (a) the monthly payment; (b) the total interest payments over the 10-year ownership th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved Solution • (a) Monthly payments under a 5/1 hybrid mortgage A1−60 = $100,000(A/ P,0.5017%,360) = $600.84 A60−72 = $93,074(A/ P,0.5375%,300) = $625.54 A73−84 = $91,526(A/ P,0.5500%,288) = $634.03 th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved (b) Total Interest Payment over 10 Years th Contemporary Engineering Economics, edition Park Copyright © 2016 by Pearson Education, Inc All Rights Reserved ...Credit Card Debt Management Credit card debt and commercial loans are among the most significant financial transactions involving... Copyright © 2016 by Pearson Education, Inc All Rights Reserved Solution •Option A: Conventional Debt Financing: Pdebt = $4,500 + $736.53(P/A, 4.5%/12, 42) − $17,817(P/F, 4.5%/12, 42) = $17,847 •Option