This problem illustrates a deceptive way of quoting interest rates called add-on interest …..
| 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: “$1,500 Instant Credit! 18.4% 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. |
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| Judy explains that if you borrow $1,500 for three years at 18.4 percent interest, in three years you will owe: |
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| $1,500 × 1.1843 = $1,500 × 1.65980 = $2,489.70 |
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| Now, Judy recognizes that coming up with $2,489.70 all at once might be a strain, so she lets you make “low, low monthly payments” of $2,489.70/36 = $69.16 per month, even though this is extra bookkeeping work for her. |
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What is the APR on this loan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
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What is the EAR on this loan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
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| a. Annual percentage rate |
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% |
| b. Effective annual rate |
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% |
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An investment will pay you $95,000 in 10 years. If the appropriate discount rate is 9 percent compounded daily, what is the present value? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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This problem illustrates a deceptive way of quoting interest rates called add-on interest ….
