This problem illustrates a deceptive way of quoting interest rates called add-on

Question

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: “$1,000 Instant Credit! 17.3% 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 $1,000 for three years at 17.3 percent interest, in three years you will owe:

Judy recognizes that coming up with $1,613.96 all at once might be a strain, so she lets you make “low, low monthly payments” of $1,613.96 / 36 = $44.83 per month, even though this is extra bookkeeping work for her.

What is the APR on this loan? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What is the EAR? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

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: “$1,000 Instant Credit! 17.3% 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.

Explanation / Answer

Here, APR will be 17.3% only. Here already annual rate is given which is 17.3%

Effective annual rate is different from APR only of there is some additional charges for loan or interest is compounding in a frequency other than manual. Here none of the situation exist therefore, EAR would also be 17.3%.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.