A local finance company quotes a 14 percent interest rate on one-year loans. So, if you borrow $20,000, the interest for the year will be $2,800. Because you must repay a total of $22,800 in one year, the finance company requires you to pay $22,800/12, or $1,900.00, per month over the next 12 months. a. What rate would legally have to be quoted? Annual percentage rate 24.91% b. What is the effective annual rate? Effective annual rate 27.96%
A local finance company quotes a 14 percent interest rate on one-year loans. So, if you borrow $20,000, the interest for the year will be $2,800. Because you must repay a total of $22,800 in one year, the finance company requires you to pay $22,800/12, or $1,900.00, per month over the next 12 months. a. What rate would legally have to be quoted? Annual percentage rate 24.91% b. What is the effective annual rate? Effective annual rate 27.96%
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:A local finance company quotes a 14 percent interest rate on one-year loans. So, if you
borrow $20,000, the interest for the year will be $2,800. Because you must repay a total
of $22,800 in one year, the finance company requires you to pay $22,800/12, or
$1,900.00, per month over the next 12 months.
a. What rate would legally have to be quoted?
Annual percentage rate
24.91%
b. What is the effective annual rate?
Effective annual rate
27.96%
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