Question C Your credit card has an EFFECTIVE rate of 28% You can pay off your cr

Question

Question C Your credit card has an EFFECTIVE rate of 28% You can pay off your credit card debt in 8 months by paying S500 each month. What is the current balance on your credit card? Question D You would like to setup a trust fund for your two children to ensure that they will be taken care of in the future. At the end of this year, you would like each of your children to receive $25,000 (2 x S25,000- $50,000 payment received at the end of the year), and you would like to have this amount grow at the rate of inflation, (which will be assumed to be 300 forever) How much do you need to have in the trust fund if you are able to receive 4% return on

Explanation / Answer

Since, multiple questions have been posted and Question D is also not complete, I have answered question C.

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Question C:

Step 1: Calculate Nominal Interest Rate Per Month

The value of nominal interest rate can be derived with the use of following formula:

Nominal Interest Rate (Annual) = Number of Compounding Periods*[(1+Effective Rate of Interest)^(1/Number of Compounding Periods - 1]

Substituting values in the above formula, we get,

Nominal Interest Rate (Annual) = 12*[(1+28%)^(1/12) - 1] = 24.94%

Now, we can determine monthly nominal interest rate as below:

Nominal Interest Rate (Monthly) = Nominal Interest Rate (Annual)/12 = 2.08%

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Step 2: Calculate the Credit Card Balance

The credit card balance can be calculated with the use of PV (Present Value) function/formula of EXCEL/Financial Calculator. The function/formula for PV is PV(Rate,Nper,PMT,FV) where Rate = Interest Rate, Nper = Period, PMT = Payment and FV = Future Value (if any).

Here Rate = 2.08%, Nper = 8, PMT = $500 and FV = 0

Using these values in the above function/formula for PV, we get,

Credit Card Balance (PV) = Rate(2.08%,8,500,0) = $3,650.38

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Notes:

There can be a slight difference in final answer on account of rounding off values.

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