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: "$1,400 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 $1,400 for three years at 17% interest, in three years you will owe: $1,400 x 173 = $1,400 x 1.60161 = $2,242.26 Now, Judy recognizes that coming up with $2,242.26 all at once might be a strain, so she lets you make "low, low monthly payments" of $2,242.26/36 = $62.28 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 24.48 % What is the EAR? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Effective percentage rate 27.12 %
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: "$1,400 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 $1,400 for three years at 17% interest, in three years you will owe: $1,400 x 173 = $1,400 x 1.60161 = $2,242.26 Now, Judy recognizes that coming up with $2,242.26 all at once might be a strain, so she lets you make "low, low monthly payments" of $2,242.26/36 = $62.28 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 24.48 % What is the EAR? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Effective percentage rate 27.12 %
Chapter5: Managing Checking And Savings Accounts
Section: Chapter Questions
Problem 7FPC
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Transcribed Image Text: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: "$1,400 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 $1,400 for three years at 17% interest, in three years you will owe:
$1,400 x 173 = $1,400 x 1.60161 = $2,242.26
Now, Judy recognizes that coming up with $2,242.26 all at once might be a strain, so she lets you make "low, low monthly payments"
of $2,242.26/36 = $62.28 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
24.48
%
What is the EAR? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)
Effective percentage rate
27.12
%
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