Financial Maths (1 Viewer)

[kris86]

I was wondering if anyone could explain to me the concept of the next question. i dont understand them at all.

Frank has a credit card with an interest rate of 0.05% per day and no interest-free period.

Frank used the credit card to pay for car repairs costing $480. He paid the credit card account 16 days later. What is the total amount (including interest) that he paid for the repairs?

A $480.24
B $483.84
C $504.00
D $864.00


Thank you

 

[pLuvia]

it means for everyday of not paying the amount back Frank is charged 0.05% of the total amount.
I.e
1st day not paying back $480 x 0.05% = 0.24, so if he paid it back on the 1st day he would only pay $480.24 (adding the total amount to the interest paid)
2nd day not paying back $480.24 x 0.05% = 0.24, so if he paid it back on the 2nd day he would only pay $480.48

and the trend continues

 

[PC]

It's just another case of interest being charged on a principal amount. In this case the principal is the amount of the purchase ($480), the interest rate is 0.05% per day (or 0.0005 as a decimal) and the length of time is 16 days.

But there are two ways to go about this question. Do you use simple interest or do you use compound interest?

Most textbooks and teachers will tell you to use simple interest, but do you reckon that banks in real life will use simple interest? No way!

Using simple interest:
I = Prn = 480 x 0.0005 x 16 = $3.84
So the total amount to repay is the amount of the purchase plus the interest charged.
Total = 480 + 3.84 = $483.84
Answer: B

Using compound interst (as kadlil did):
A = P(1 + r)^n = 480(1 + 0.0005)^16 = 480 * 1.00803007 = 483.8544337
So the total amount to repay is $483.85
This is not given as an answer, so you'd probably choose the closest, which is B anyway.

There seems to have been attempt by the people at the Board of Studies to remove any such ambiguity in a credit card question by clearly stating if the interest charged at a flat rate (simple interest) or at a compound rate.

Good luck.