1. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Debt Management Lecture No. 13 Chapter 4 Contemporary Engineering Economics Copyright © 2016

2. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Credit Card Debt Management Credit card debt and commercial loans are among the most significant financial transactions involving interest.

3. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Example 4.14: Loan Balance, Principal, and Interest  Given: o P = $5,000, o i = 12% APR, o N = 24 months  Find: A

4. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Solution  Monthly Payment: A = $5,000(A/P, 1%, 24) = $235.37

5. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Calculating the Remaining Loan Balance after Making the n th Payment

6. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Example 4.15: Loan Balance at End of Period 6  Given: P = $5,000, i = 12% APR, N = 24 months  Find: Loan balance, principal, and interest payment for the 6 th payment

7. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Solution  Monthly payment: $235.37  Interest payment at n = 6 Loan balance at the end of n = 5, or beginning of n = 6 Interest payment Principal payment

8. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Example 4.17: Financing Your Vehicle  Given: Three financing options r = 4.5% Payment period = monthly Compounding period = monthly  Find: Which option is best?

9. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Solution Option A: Conventional Debt Financing: P debt = $4,500 + $736.53(P/A, 4.5%/12, 42) − $17,817(P/F, 4.5%/12, 42) = $17,847 Option B: Cash Financing P cash = $31,020 − $17,817(P/F,4.5%/12,42) = $15,845 Option C: Lease Financing P lease = $1,507.76 + $513.76(P/A, 4.5%/12, 42) + $395(P/F, 4.5%/12, 42) = $21,336

10. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Home Mortgage Types of Home Mortgages Fixed-rate mortgage Adjustable-rate mortgage Hybrid mortgage The Cost of a Mortgage Loan amount Loan term Payment frequency Points (prepaid interest) Fees Types of mortgages

11. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Example 4.16: An Interest-Only Versus a Fully Amortized Mortgage  Given: P = $200,000, APR = 6.6% or 0.55% per month, and N = 30 years  Find: (a) monthly payment; (b) interest payments during the first year of ownership of the home. Option 1: A fully amortized payment option. Option 2: A five-year interest-only option.

12. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Solution (a) Monthly payments

13. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Solution (b) Interest payments

14. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Calculating the Monthly Payments with an Adjustable-Rate Mortgage (ARMs) Index: a guide that lenders use to measure interest rate changes Margin: an interest rate that represents the lender’s cost of doing business plus the profit Adjustment period: the period between potential interest rate adjustments (e.g., 3/1 means your interest rate is fixed for the first 3 years, then could be adjusted every year thereafter) Interest rate cap: a limit on the amount your interest can change (a periodic cap and a lifetime cap) Payment cap: how much your monthly payment can increase at each adjustment

15. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Example 4.18: A 5/1 Hybrid Adjustable Mortgage Plan  Given: Varying annual mortgage rates and N = 30 years  Find: (a) the monthly payment; (b) the total interest payments over the 10-year ownership

16. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Solution (a) Monthly payments under a 5/1 hybrid mortgage

17. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved (b) Total Interest Payment over 10 Years