# Problem Set 3

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Problem Set 3
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

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