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Small Print says: Pay in 36 equal monthly installments, interest free, until September 2013. If you do not pay the full PowerPoint Presentation
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Small Print says: Pay in 36 equal monthly installments, interest free, until September 2013. If you do not pay the full - PowerPoint PPT Presentation


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Small Print says: Pay in 36 equal monthly installments, interest free, until September 2013. If you do not pay the full amount of an installment when due, the u npaid portion of that installment will thereafter accrue interest as

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Presentation Transcript
slide1

Small Print says:

Pay in 36 equal monthly installments, interest free, until September 2013.

If you do not pay the full amount of an installment when due, the

unpaid portion of that installment will thereafter accrue interest as

of the first day of the next statement period at the rate then in force

for purchase transactions

If your account falls four (4) billing cycles past due, this program will

terminate and the unpaid balance will accrue interest at the rate then

in force for purchase transactions

slide2

Small Print says:

Pay in 36 equal monthly installments, interest free, until September 2013.

If you do not pay the full amount of an installment when due, the

unpaid portion of that installment will thereafter accrue interest as

of the first day of the next statement period at the rate then in force

for purchase transactions

If your account falls four (4) billing cycles past due, this program will

terminate and the unpaid balance will accrue interest at the rate then

in force for purchase transactions

What is the rate then in force for purchase transactions?

Lengthy search shows it’s 19.99%

Is this effective annual, effective monthly, effective daily or what?

slide3

Sears credit card interest rate is 19.99% per year, compounded monthly

So this is a nominal rate.

The effective monthly rate is 19.99/12 = 1.66% per month

So the effective annual rate is (1.0166)12 – 1 = 22%

What happens if you take up their offer of:

Pay in 36 equal monthly installments, interest free, until September 2013?

slide4

Pay in 36 equal monthly installments, interest free, until September 2013

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36

Suppose you buy $5000 of Sears stuff this September, how much will

you pay every month?

slide5

Pay in 36 equal monthly installments, interest free, until September 2013

A

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36

Suppose you buy $5000 of Sears stuff this September, how much will

you pay every month?

After 12 months’ you’ve paid 12A, so you still owe $5000-12A

slide6

Pay in 36 equal monthly installments, interest free, until September 2013

A

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12

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36

After 12 months’ you’ve paid 12A, so you still owe $5000-12A

So 5000 - 12A = A(P/A, 0.0166,24) = 19.66 A

So 5000 = (19.66 + 12) A = 31.66 A

So A = $158

slide7

Pay in 36 equal monthly installments, interest free, until September 2013

$158

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2

12

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36

What uniform interest rate is this equivalent to?

$5000 = 158 (P/A, i, 36)

So (P/A, i, 36) = 5000/158 = 31.645

So i = 0.8% per month, which is equivalent to 10% per year

You can get a line of credit at 6 – 8 % per year