Introduction to Finance

Financial Calculator Solution:
Inputs: 20 
4 
1000
N 
%i 
PV
Press: CPT FV
Solution: 2191.12
Spreadsheet Solution:
The Excel FV function inputs would be, 
= FV(0.04,20,0,–1000,0)
= 
$2,191.12
Table-based Solution:
The future value interest factor (FVIF) can also be found in Table 1 in the Appendix. When 
a three-decimal-place table is used, the factor is 2.191 with a future value of $2,191 (roun-
ded). Notice that semi-annual compounding will result in $32 more than the $2,159 earned 
with annual compounding. It follows that more frequent compounding, such as quarterly or 
monthly, produces even higher earnings.
The process described also applies to discounting problems when discounting occurs 
more frequently than annually. The use of fi nancial calculators and spreadsheet programs are 
more expedient as the frequency of compounding or discounting within a year increases.
DISCUSSION QUESTION 3
How can the high cost of consumer credit card debt be explained when interest rates on 
other types of consumer loans seem to be lower?
Cost of Consumer Credit
Unethical Lenders 
ETHICAL
History has shown many examples of individuals being 
charged exorbitant interest rates on loans. There is a word, 
usury,
for this type of action. 
Usury 
is the act of lending money at an excessively high interest rate. Lenders who exhibited such 
unethical behavior were sometimes referred to as “loan sharks.” Lenders, of course, are in 
the business of making a rate of return on the money that they have to lend. Without question, 
usury 
the act of lending money 
at an excessively high interest 
rate

---

9.9 More Frequent Time Intervals and The Cost of Consumer Credit
243
lenders deserve to earn a fair rate of return to compensate them for their time and for the risk 
that the borrower will not repay the interest and/or principal on time or in full.
In Chapter 8, we defi ned this added compensation as a risk premium above the prevail-
ing risk-free rate. Good ethical behavior is consistent with treating borrowers honestly and 
fairly. However, because of the existence of unethical lenders, various laws have made usury 
illegal. While it is illegal to charge usurious rates of interest, some unscrupulous lenders still 
behave unethically when making loans to consumers. Congress passed the 
Consumer Credit 
Protection Act of 1968
,
 
which prohibits excessively high-priced credit transactions. Regula-
tion Z enacts the Truth in Lending section of the act, whereby the Federal Reserve has the 
responsibility of making consumers aware of the costs of alternative forms of credit. Lenders 
must disclose all loan costs (interest amounts, service charges, loan and fi nder fees, etc.), as 
well as the 
annual percentage rate
of charge or interest. It is unfortunate, but a fact of life, that 
because of the unethical behavior of some lenders, laws must be enacted to protect consumers.