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Interest, Annuity, Installment loan, Mortgage

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1. Define simple interest and compound interest. Explain the difference between each.

2. Define annual percentage rate (APR). What effect does frequency of compounding have on the annual percentage yield (APY)? What condition would exist if the APR = APY?

3. What is an ordinary annuity? What is an annuity due? Which is more prevalent in apartment leases?

4. A very smart child understands annuities and wishes to invest part of his allowance each week to save up for college. The child's parents figure, they would kick in with matching funds, so each month, he deposits a total of $50. Let us suppose that the child continues from age 5 to age 20. Given a fixed APR of 5%, what might the child expect to have at age 20?

5. What is an example of an installment loan? What type of installment loan does not require the borrower to pay off the balance?

6. Explain the difference between a fixed rate and adjustable rate mortgage.

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Solution Preview

Please see the attached file.

1. Interest. Define simple interest and compound interest. Explain the difference between each.
Simple interest is a specific amount paid on the principle of an investment. Compound interest adds this amount to the principle and interest is paid on this combined amount. In general, simple interest pays a fixed rate and compound interest pays an increasing rate.
2. APR. Define annual percentage rate. What effect does frequency of compounding have on the annual percentage yield (APY)? What condition would exist if the APR = APY?
Annual percentage rate is the amount you will pay on a loan over the course of a year. The more frequently ...

Solution Summary

The solution examines interest, annuity, installment loan and mortgages. The annual percentage rate are examined.

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