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Find the approximate annual percentage rate

  1. Apr 25, 2006 #1
    Math help!!

    I am home schooled and need some help with a few math problems that I have. These problems are the only thing holding me back from my diploma and i can't figure them out. Can I please get some help?

    1. Using the "previous balance method", calculate the finance charge:
    Previous Balance: $943.29 APR: 18.5 Finance Charge:?
    $513.40 APR: 18 Finance Charge:?

    2. Using the "Average daily Balance Medthod", determine the finance charge. A customer's charge account shos a balance of $423.50 on May 1. A payment of $123.50 was made on May 10. Purchases of $290 were made on May 15. An annual rate of 18.5% is applied to your account.
    Average Daily Balance: ?
    Finance Charge: ?

    3. Find the approximate annual percentage rate for these problems using the approximate annual percentage rate formula:
    Loan:$1,950 Finance Charge:$375
    #of mo. Payments:24 APR: ?
    Loan:$1,670 Finance Charge: $200
    #of mo. Payments:12 APR: ?

    Thank you so much for your help!!:smile:
  2. jcsd
  3. Apr 26, 2006 #2


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    Staff Emeritus
    Science Advisor

    I should point out that those are not mathematics terms so much as business administration.

    First start by looking up some definitions:

    What, exactly, is the "previous balance method"?

    What, exactly, is the "Average daily Balance Method"?

    Where ever you are getting those problems from should have formulas to calculate them.

    Since I was not familiar with those terms myself I went to "google.com" and searched for them and got this:
    http://www.investorwords.com/3806/previous_balance_method.html and

    Apparently the "previous balance method" gives you this month "free" but charges interest on any "previous balance" (my credit cards do that which is why I am careful to pay off the entire balance every month!).
    In problem one, you are told that the previous balance is $943.29 and the APR (annual percentage rate) is 18.5% which is the same as 0.185 as a decimal. You can calculate the interest for the month in either of two ways: 1) divide 0.185 by 12 to get the monthly interest rate and then multiply by the previous balance $943.29. 2) multiply 0.185 by $943.29 to get the interest for one year and then divide by 12 to get the interest for one month. Of course, those two calculation give exactly the same answer.

    The "average daily balance method" is harder because you have to calculate the "average daily balance". In problem 2, the person had a balance of $423.50 for 9 days (May 1 through May 9) but then paid off $123.50 so had a balance of $423.50- $123.50 = $300 for 5 days (May 10 to 14). On May 15 the person spent $290 and so had a balance of $290+ $300= $590 for 17 days (to the end of the month). That's an average of
    (9(423.50)+5(300)+ 17(590))/31= $494.89. (This is the same as adding the amounts for every day of the month and then dividing by the 31 days in the month.) The person had a daily average balance of $494.89. Now do the same as in problem 1 with that balance.

    For problem 3 since it says "use the approximate annual percentage rate formula" you'd better have that formula! I don't know it offhand but I suspect you would just divide the finance charge by the loan amount, then divide by the number of years to find the annual percentage rate.

    I recommend you look up the appropriate formulas.
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