Ricky Ripov’s Pawn Shop charges an interest rate of 12.75 percent per month on l

Question

Ricky Ripov’s Pawn Shop charges an interest rate of 12.75 percent per month on loans to its customers. Like all lenders, Ricky must report an APR to consumers.

What rate should the shop report? (Round your answer as directed, but do not use rounded numbers in intermediate calculations. Enter your answer as a percent rounded to decimal places (e.g., 32.16).

What is the effective annual rate? (Round your answer as directed, but do not use rounded numbers in intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Ricky Ripov’s Pawn Shop charges an interest rate of 12.75 percent per month on loans to its customers. Like all lenders, Ricky must report an APR to consumers.

Explanation / Answer

Requirement 1:

What rate should the shop report?

Solution-

The annual percentage rate is the interest rate (IR) of per period time of the number of period in year. Interest Rate is12.75 percent per month and there is 12 months in the year.

So,

APR = 12(12.75%)

APR= 153%

Annual percentage rate = 153%

Requirement 2:

What is the effective annual rate?

Solution-

EAR = [1+ (APR /m)]m-1

EAR = (1+0.1275)12-1

EAR = 3.2208 or 322.08%

Effective annual rate = 322.08%

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