The Boston Globe on New Year's Day 2009 reported that a New Hampshire law will cap the interest rate on payday loans at 36 percent per year. Payday lenders typically chard $20 per $100 for two-week loans backed by the borrower's car title or next paycheck. That amounts to 1.43 percent interest per day, an annual rate of 521 percent. (R2671 The cap will limit the daily rate to about 0.1 percent, so just $1.38 - a dime a day - on that two week $100 loan. (a) What is a "payday loan"? (b) Verify the computation that 1.43% interest per day is 521% interest annually. (c) If the 1.43% interest is compounded daily then the true annual rate of interest is in fact much more than 521%. How much is it? (HINT: Start with the calculation (1 + 0.0143) 365 . The answer is hard to believe.) (d) Verify that paying interest of $1.38 on a two-week loan of $100 is just about a "dime a day" and corresponds to a daily interest rate of about a tenth of a percent. What annual rate does that represent? (e) Visit a payday loan website and report on what you discover there about interest rates.
The Boston Globe on New Year's Day 2009 reported that a New Hampshire law will cap the interest rate on payday loans at 36 percent per year. Payday lenders typically chard $20 per $100 for two-week loans backed by the borrower's car title or next paycheck. That amounts to 1.43 percent interest per day, an annual rate of 521 percent. (R2671 The cap will limit the daily rate to about 0.1 percent, so just $1.38 - a dime a day - on that two week $100 loan. (a) What is a "payday loan"? (b) Verify the computation that 1.43% interest per day is 521% interest annually. (c) If the 1.43% interest is compounded daily then the true annual rate of interest is in fact much more than 521%. How much is it? (HINT: Start with the calculation (1 + 0.0143) 365 . The answer is hard to believe.) (d) Verify that paying interest of $1.38 on a two-week loan of $100 is just about a "dime a day" and corresponds to a daily interest rate of about a tenth of a percent. What annual rate does that represent? (e) Visit a payday loan website and report on what you discover there about interest rates.
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 Boston Globe on New Year's Day 2009 reported that a New Hampshire law will cap the interest rate on payday loans at 36 percent per year.
Payday lenders typically chard $20 per $100 for two-week loans backed by the borrower's car title or next paycheck. That amounts to 1.43 percent interest per day, an annual rate of 521 percent. (R2671
The cap will limit the daily rate to about 0.1 percent, so just $1.38 - a dime a day - on that two week $100 loan.
(a) What is a "payday loan"?
(b) Verify the computation that 1.43% interest per day is 521% interest annually.
(c) If the 1.43% interest is compounded daily then the true annual rate of interest is in fact much more than 521%. How much is it?
(HINT: Start with the calculation (1 + 0.0143) 365
. The answer is hard to believe.)
(d) Verify that paying interest of $1.38 on a two-week loan of $100 is just about a "dime a day" and corresponds to a daily interest rate of about a tenth of a percent. What annual rate does that represent?
(e) Visit a payday loan website and report on what you discover there about interest rates.
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