Problem 6-71 Calculating EAR with Add-On Interest (LO3) This problem illustrates a deceptive way of quoting interest rates called add-on interest. Imagine that you see an advertisement for Crazy Judy’s Stereo City that reads something like this: “$1,240 Instant Credit! 17% Simple Interest! Three Years to Pay! Low, Low Monthly Payments!” You’re not exactly sure what all this means and somebody has spilled ink over the APR on the loan contract, so you ask the manager for clarification. Judy explains that if you borrow $1,240 for three years at 17% interest, in three years you will owe: $1,240 × 173 = $1,240 × 1.60161 = $1,986.00 Now, Judy recognizes that coming up with $1,986.00 all at once might be a strain, so she lets you make “low, low monthly payments” of $1,986.00/36 = $55.17 per month, even though this is extra bookkeeping work for her. What is the APR (monthly) on this loan? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Annual percentage rate % What is the EAR? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Effective percentage rate %
Problem 6-71 Calculating EAR with Add-On Interest (LO3)
This problem illustrates a deceptive way of quoting interest rates called add-on interest. Imagine that you see an advertisement for Crazy Judy’s Stereo City that reads something like this: “$1,240 Instant Credit! 17% Simple Interest! Three Years to Pay! Low, Low Monthly Payments!” You’re not exactly sure what all this means and somebody has spilled ink over the APR on the loan contract, so you ask the manager for clarification.
Judy explains that if you borrow $1,240 for three years at 17% interest, in three years you will owe:
$1,240 × 173 = $1,240 × 1.60161 = $1,986.00
Now, Judy recognizes that coming up with $1,986.00 all at once might be a strain, so she lets you make “low, low monthly payments” of $1,986.00/36 = $55.17 per month, even though this is extra bookkeeping work for her.
What is the APR (monthly) on this loan? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)
Annual percentage rate %
What is the EAR? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)
Effective percentage rate %
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