The "-5-6" scheme is availed by a lot of individuals and 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 P5 you are required to pay P6 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 of a burden to bear by the borrower?
The "-5-6" scheme is availed by a lot of individuals and 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 P5 you are required to pay P6 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 of a burden to bear by 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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The "-5-6" scheme is availed by a lot of individuals and 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 P5 you are required to pay P6 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 of a burden to bear by the borrower?
Which of the two projects, Project O and Project Y, should the company pursue? Why?
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