Question

In general, reducing the interest rate (i) of a credit card but keeping the present value (PV) and number of periods (n) the same will __________. a. decrease the monthly payment (P) needed to pay off the debt b. increase the monthly payment (P) needed to pay off the debt c. eliminate the monthly payment (P) needed to pay off the debt d. have no effect on the monthly payment (P) needed to pay off the debt

Answer 1

If the present value and number of periods are the same, but interest rate is lowered, this means that less interest needs to be paid each month, and the correct answer is a) decrease the monthly payment.
Monthly payments would increase if the interest rate increases. Monthly payments cannot be eliminated.

Answer 2

The correct answer is:

A) decrease the monthly payment (P) needed to pay off the debt.

Explanation:

When calculating the monthly payment, the interest rate affects the amount you pay.

The higher the interest rate is, the more you must pay monthly in order to pay the debt off within the same number of time periods.

However, if you lower the interest rate, the reverse will be true; you will need to pay less money each month in order to pay off the debt within the same amount of time.