Question

Sam is getting ready for a big date when he realizes that he has no money. His roommate, Bill, also has no money, but he has a credit card. Knowing that nobody will let Sam use Bill’s credit card, Sam asks Bill to pull out a cash advance for $120.00. Bill agrees under the condition that Sam is responsible for all interest that accrues on the cash advance which is a 30% interest rate, compounded monthly. The $120 cash advance is repaid in monthly installments over 5 years. How much should Bill ask Sam to pay in interest for the cash advance?
a.
$3.88
b.
$112.80
c.
$120.00
d.
$232.80

Answer 1

Monthly rate = 0.30/12 = 0.025. The amortizing monthly payment is

M = 120(0.025) / [1 − (1.025)^(−60)] ≈ $3.883... per month.

Total repaid ≈ 3.883 × 60 = $232.80, so interest = 232.80 − 120.00 = $112.80.

Answer: b. $112.80.