# Problem Set 3

1. Louise McIntyre’s monthly gross income is $2,000. Her employer withholds $400 in federal, state, and local income taxes and $160 in Social Security taxes per month. Louise contributes $80 per month for her IRA. Her monthly credit payments for VISA, MasterCard, and Discover card are $35, $30, and $20, respectively. Her monthly payment on an automobile loan is $285. What is Louise’s debt payments-to-income ratio? Is Louise living within her means? Louise’s Gross Income| =| $2,000|

Less: Income taxes| =| -400|

Less: Social Security Tax| =| -160|

Less: IRA contribution| =| -80|

Net take-home pay| =| $1,360|

Her monthly payments on VISA, MasterCard, Discover Card, and a car loan add up to $370 per month. Louise's debt payments to income ratio is 370 to 1,360, or 27.2 percent. This ratio exceeds the recommended 20 percent figure. Therefore, Louise is overextended her means. | | |

2. Calculating Debt Payments – to - Income Ratio. Suppose that your monthly net income is $2,400. Your monthly debt payments include your student loan payment, a gas credit card and they total $360. What is your debt payments – to – income ratio?

Monthly net income = $2,400

Total monthly debt payments = $360

Debt-payments-to-income ratio = $360 ÷ $2,400 = 0.15 or 15%

3. Dave borrowed $500 for one year and paid $50 in interest. The bank charged him a $5 service charge. A- What is the finance charge on this loan? $50 + 5 = $55

B- Dave borrowed $500 on January 1, 2006, and paid it all back at once on December 31, 2006. What was the APR? $55 on $500 or 11% APR

C- If Dave paid the $500 in 12 equal monthly payments, what is the APR? APR= 20.3%

4. Calculating Simple Interest on a Loan. Damon convinced his aunt to lend him $2,000 to purchase a plasma digital TV. She has agreed to charge only 6 % simple interest, and he has agreed to repay the loan at the end of one year. How much interest will he...

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