Question

11. You have credit card debt of $25,000 that has an APR (monthly compounding) of 15%. Each month you pay the minimum monthly payment only. You are required to pay only the outstanding interest. You have received an offer in the mail for an otherwise identical credit card with an APR of 12%. After considering all your alternatives, you decide to switch cards, roll over the outstanding balance on the old card into the new card, and borrow additional money as well. How much can you borrow today on the new card without changing the minimum monthly payment you will be required to pay? Assumption: (i) treat the interest payments as perpetuity; (ii) your current monthly payment is the interest that accrues

Answer 1

Answer:

We can borrow an additional 6,250 dollars

Explanation:

credit card rate:

old one: 0.15 / 12 = 0.0125 percent per month

new one: 0.12 / 12 = 0.01

interest forthe old car:

25,000 x 0.0125 = 312,5

now we convert this payment in a perpetuity with a rate of 0.01

312,5 / 0.01 = 31.250‬

maximun balance 31,250 current balance 25,000

available for loan 6,250 (31,250 - 25,000)