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    Compounding Interest on a Monthly Basis

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    You receive a credit card application from Ally Bank Savings offering an introductory rate of 0.6 percent per year, compounded monthly for the first six months, increasing thereafter to 16.3 percent compounded monthly. Assume you transfer the $5,300 balance from your existing credit card and make no subsequent payments.

    How much interest will you owe at the end of the first year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

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    Solution Preview

    Step 1: Find the Monthly Interest in the first six month period
    First of all, recall that interest rates are always quoted on an annual basis. Therefore the 0.6% is an annual quotation (12 months). Do not be confused by the fact that this amount is only charged for a 6 month period. To find the monthly interest we must divide by 12 months, not by 6 months.
    Monthly interest rate = 0.6%/12 = 0.05%

    Step 2: Calculate the Interest that will be compounded in the first six months
    The number of times that interest ...

    Solution Summary

    This solution assists with determining the compounded interest.