Explanation:: (Round Your Answer To 2 Decimal Places.)

Chapter 7
1. You just graduated and accepted the job of your dreams. You will be making
$4,000 a month and renting an apartment that will cost you $950 a month. You have
no other debt. (Use the 28/36 rule from Chapter 5.)
Explanation:
a.
The maximum monthly debt payments you can afford equal 36% of your monthly gross income, so:
Maximum monthly debt = $4,000 × 0.36 = $1,440

Maximum car payment = $1,440 − $950 Rent = $490
b.
Maximum monthly debt = $4,000 × 0.36 = $1,440
Maximum car payment = $1,440 − $950 Rent − $250 Student loan − $200 Credit card = $40
2. You pick out a new car and the dealer is offering 0% interest for 60 months or a
$4,000 cash-back bonus. Your negotiated price is $25,000. Your credit union is
currently offering a special 3.5% for 60-month car loans.
a. What will be your monthly car payment if you accept the 0% interest offer? (Round your answer to
2 decimal places.)
Monthly car payment $
b. What will be your monthly car payment if you accept the $4,000 cash-back bonus and finance the
purchase at your credit union? (Round your answer to 2 decimal places.)
Monthly car payment $
c. Should you accept the 0% interest offer or the cash-back bonus?
Cash-back bonus
Explanation:
a.
Using a financial calculator and selecting the 0% interest offer:
N = 60, I/Period = 0%/12, PV = –$25,000, FV = 0, CPT PMT, PMT = $416.67
b.
Selecting the $4,000 cash-back bonus:
N = 60, I/Period = 3.5%/12, PV = –$21,000, FV = 0, CPT PMT, PMT = $382.03
c.
You should accept the cash-back bonus because it provides the lowest monthly payment.
3. You are ready to purchase your first home. Your annual salary is $42,000. You
have been able to save $15,000 for a down payment, and the only debt you currently
owe is your student loan with a payment of $150 a month and your car payment of
$350 a month. (Use the 28/36 rule from Chapter 5.)
a. Given your current situation, how much can you afford for a house payment?
Maximum monthly house payment $ /month
b. If you no longer have a car payment, what monthly mortgage payment could you qualify for, given
your outstanding credit history?
Maximum monthly house payment $ /month
Explanation:
a.
Maximum monthly house payment under the 28% rule = 0.28 × ($42,000/12) = $980
Maximum total debt payments under the 36% rule = 0.36 × ($42,000/12) = $1,260
Maximum monthly house payment under the 36% rule = $1,260 − $150 Student loan − $350 Car
payment = $760
The maximum monthly payment you can afford for a house, including principal, interest, taxes, and
insurance, is the lower of the two payments computed under the 28/36 rule, or $760 in this case.
b.
Maximum monthly house payment under the 28% rule = 0.28 × ($42,000/12) = $980
Maximum total debt payments under the 36% = 0.36 × ($42,000/12) = $1,260
Maximum monthly house payment under the 36% rule = $1,260 − $150 Student loan = $1,110
The maximum monthly payment you can afford for a house, including principal, interest, taxes, and
insurance, is the lower of the two payments computed under the 28/36 rule, or $980 under this scenario.
4. What is the loan payment on a 30-year, fixed-rate/fixed-term mortgage loan of

$100,000 at 8%?
Loan payment $ /month
Explanation:
Using a financial calculator:
N = 360, I/Period = 8%/12, PV = −$100,000, FV = 0, CPT PMT, PMT = $733.76
5. You are looking to finance your home. The bank is offering a three-year ARM
(adjustable-rate mortgage) with an introductory rate of 3.5%. It has a 3%
adjustment cap per adjustment period, with an 8% lifetime adjustment. The rate is
4% over the one-year LIBOR rate, which is currently 1.25%.
a. What will your interest rate be after three years if the LIBOR rate does not change? (Round your
answer to 2 decimal places.)
Interest rate %
b. In three years, what it the maximum interest rate you could be charged? (Round your answer to 2
decimal places.)
Maximum interest rate %
c-1. If the LIBOR increases 1% per year for the next 10 years, up to 11.25%, what is the maximum
interest rate you will pay? (Round your answer to 2 decimal places.)
Maximum rate %
c-2. When will that maximum interest rate take effect?
Beginning of year 10
Explanation:
a.
Mortgage interest rate = 1.25% LIBOR + 4% = 5.25%
b.
Maximum mortgage interest rate = 3.5% Introductory rate + 3% Maximum adjustment per adjustment
period = 6.5%
c-1.
Rate for years 1-3:
Introductory rate = 3.5%.
First adjustment at the end of year 3, which is the rate for years 4-6:
LIBOR + 4% = [1.25% + (3 × 1%)] + 4% = 8.25%

Prior rate + Maximum adjustment per adjustment period = 3.5% + 3% = 6.5%
Introductory rate + Lifetime adjustment = 3.5% + 8% = 11.5%
The interest rate charged will be the lowest of the three rates, or 6.5%.
Second adjustment at the end of year 6, which is the rate for years 7-9:
LIBOR + 4% = [1.25% + (6 × 1%)] + 4% = 11.25%

The interest rate charged will be the lowest of the three rates, or 9.5%.
Third adjustment at the end of year 9, which is the rate for years 10 and after:
LIBOR + 4% = [1.25% + (9 × 1%)] + 4% = 14.25%

The interest rate charged will be the lowest of the three rates, or 11.5%. This is the maximum rate that
can be charged over the life of the loan.
c-2.
The maximum rate that can be charged over the life of the loan is 11.5%. This rate would first be charged
at the beginning of year 10 as a result of the third adjustment, assuming the maximum adjustment for
each rate period occurs.
6. Kim would like to purchase a new vehicle. Currently, she pays rent of $600 a
month, credit card charges of $120 a month, and a student loan payment of $230 a
month. Her gross monthly income is $4,000. Assume she wants to finance the vehicle
for 3 years at 4 percent interest. What is the most she can afford as a car loan
payment? Apply the standard 28/36 rule.
Maximum total debt payments = 0.36 × $4,000 = $1,440
Amount available for monthly car payment = $1,440 − $600 − $120 − $230 = $490
7. You should expect a new vehicle to lose how much of its value within the first
three years?
35 - 40%
20 - 25%
25 - 30%
15 - 20%
10 - 15%
New vehicles generally depreciate 35% to 40% within the first three years.
8. Which of these statements is correct?
Auto leases tend to be better than purchases for individuals who drive more miles per year
than the average person.
Lease payments tend to be lower than auto loan payments with the same duration.
Loan rates are generally lower for a used vehicle as compared to a new vehicle.
Individuals who lease vehicles tend to keep them longer than individuals who purchase
vehicles.
You can usually terminate a vehicle lease early without incurring any penalty.
Lease payments tend to be lower than purchase payments because you are only paying for the
depreciation during the lease period.
9. Which one of the following is a disadvantage of renting versus buying a house?
increased free time

lower initial costs
potential annual payment increases
unexpected repair costs
capital gain if property values rise
Rent frequently increases on an annual basis, which is a disadvantage of renting.
10. Luis purchased a home costing $350,000 three years ago. He paid 20 percent
down in cash and borrowed the remainder. Since that time, home values in his
neighborhood have declined by 10 percent. Over the past three years, Luis has paid
$4,900 on the principal balance of his mortgage. How much equity does he currently
have in his home? Has his equity increased or decreased since he purchased the
home?
Current home value = $350,000 × (1 – 0.10) = $315,000

Current mortgage balance = (0.80 × $350,000) – $4,900 = $275,100
Current equity = $315,000 – $275,100 = $39,900
Original equity = 0.20 × $350,000 = $70,000
Luis’ equity has declined over the past three years from $70,000 to $39,900.
11. Private mortgage insurance is generally required if your down payment on a

house is less than what percentage of the purchase price?
PMI is generally required if the down payment is less than 20% of the purchase price.
12. Theresa is concerned about lowering her monthly costs. Which of the following
should she do when considering a home purchase to help address her concern
regarding costs?
avoid homes in high-risk insurance areas

look for a low-maintenance, small yard
locate a home close to her place of employment
compare property taxes from one area to another
all of the above
To help keep monthly costs lower, Theresa should look for a home with low insurance premiums, low
taxes, low maintenance costs, and low daily transportation costs.
13. An adjustable-rate mortgage has a 3-year adjustment period, an introductory

rate of 5%, an adjustable rate equal to the LIBOR plus 4%, an adjustment period
cap of 3%, a lifetime rate cap of 10%, and a floor of 4%. Assume this is the end of
year 3 and the LIBOR is currently 5%. What interest rate will be charged in year
4?
LIBOR + 4% = 5% + 4% = 9%
Initial rate + Maximum period adjustment = 5% + 3% = 8%
The rate in year 4 is the lower of the two rates, or 8%.
14. Which one of the following fees that must be paid at closing, is stated correctly?
At closing, home buyers should expect to pay the following fees: loan application fee of $75 to
$300, loan origination fee of 1% of the loan amount, points of 1% to 2% of the loan amount if a
lower interest rate is desired, appraisal fee of $350 to $700, home inspection fee of $175 to $350,
and title search fee of $175 to $900.
15. Home equity lines of credit:
are fixed-rate, fixed-term loans.

charge interest that is non-deductible for tax purposes.
generally charge higher rates than typical credit cards.
are adjustable-rate loans.
are unsecured debts.
Home equity loan are adjustable-rate loans. The interest paid is generally tax-deductible for taxpayers
who itemize their deductions.
16. You had a $2,300 balance last month after your payment on your credit card.
You charged one pair of shoes on the 10th for $230. Your card has a minimum
finance charge fee of $5 per month and an APR of 12%. What is your total balance
due this period if the card’s fees are calculated via the adjusted balance method?
Total balance due $
Explanation:
Monthly interest = $2,300 × (0.12/12) = $23
Total balance due = $2,300 Beginning balance + $230 Charge + $23 Interest = $2,553
17. You have a credit card balance of $44. You have made no charges this past
month. Your card has a minimum finance charge fee of $5 per month and an APR
of 9%. What is your total balance due this period if the card’s fees are calculated via
the average daily balance method? (Do not round intermediate calculations.)
Total balance due $
Explanation:
Average daily balance = $44
Monthly interest = $44 × (0.09/12) = $0.33
Monthly finance charge = Greater of the monthly interest charge or the minimum fee = $5
Total balance due = $44 Beginning balance + $5 Finance charge = $49

Explanation:: (Round Your Answer To 2 Decimal Places.)

Uploaded by

Copyright:

Available Formats

Explanation:: (Round Your Answer To 2 Decimal Places.)

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Explanation:: (Round Your Answer To 2 Decimal Places.)

Uploaded by

Copyright:

Available Formats

Chapter 7

Maximum monthly debt = $4,000 × 0.36 = $1,440

Monthly car payment $

Monthly car payment $

c. Should you accept the 0% interest offer or the cash-back bonus?

N = 60, I/Period = 0%/12, PV = –$25,000, FV = 0, CPT PMT, PMT = $416.67

N = 60, I/Period = 3.5%/12, PV = –$21,000, FV = 0, CPT PMT, PMT = $382.03

Maximum monthly house payment $ /month

Maximum monthly house payment $ /month

4. What is the loan payment on a 30-year, fixed-rate/fixed-term mortgage loan of

N = 360, I/Period = 8%/12, PV = −$100,000, FV = 0, CPT PMT, PMT = $733.76

Maximum interest rate %

c-2. When will that maximum interest rate take effect?

Introductory rate = 3.5%.

LIBOR + 4% = [1.25% + (3 × 1%)] + 4% = 8.25%

LIBOR + 4% = [1.25% + (6 × 1%)] + 4% = 11.25%

LIBOR + 4% = [1.25% + (9 × 1%)] + 4% = 14.25%

8. Which of these statements is correct?

9. Which one of the following is a disadvantage of renting versus buying a house?

increased free time

Current home value = $350,000 × (1 – 0.10) = $315,000

11. Private mortgage insurance is generally required if your down payment on a

avoid homes in high-risk insurance areas

13. An adjustable-rate mortgage has a 3-year adjustment period, an introductory

15. Home equity lines of credit:

are fixed-rate, fixed-term loans.

You might also like