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 %
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
Related questions
Question
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
%
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 1 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education