1. How do we compute the effective annual interest rate? 2. Will the effective annual rate increase as the frequency of compounding increases? A. The "5-6" scheme availed by a lot of individuals is prohibited by law. This transaction is considered usurious because of the unreasonable interest charged by the creditor to the borrower of the loan. It is called "5-6" because when you borrow 5 pesos, you are required to pay 6 pesos after a month. This translates into a monthly interest rate of 20%. Assuming monthly compounding, what is the effective annual interest rate of this scheme that makes it too much a burden to bear for the borrower?
1. How do we compute the effective annual interest rate? 2. Will the effective annual rate increase as the frequency of compounding increases? A. The "5-6" scheme availed by a lot of individuals is prohibited by law. This transaction is considered usurious because of the unreasonable interest charged by the creditor to the borrower of the loan. It is called "5-6" because when you borrow 5 pesos, you are required to pay 6 pesos after a month. This translates into a monthly interest rate of 20%. Assuming monthly compounding, what is the effective annual interest rate of this scheme that makes it too much a burden to bear for the borrower?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:1. How do we compute the effective annual interest rate?
2. Will the effective annual rate increase as the frequency of compounding increases?
A. The "5-6" scheme availed by a lot of individuals is prohibited by law. This transaction is
considered usurious because of the unreasonable interest charged by the creditor to the
borrower of the loan. It is called "5-6" because when you borrow 5 pesos, you are required to
pay 6 pesos after a month. This translates into a monthly interest rate of 20%. Assuming
monthly compounding, what is the effective annual interest rate of this scheme that makes it
too much a burden to bear for the borrower?
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