You have two options of paying for your new dishwasher ,you can either make a si

Question

You have two options of paying for your new dishwasher ,you can either make a single payment of $400 today,or you can pay $70 for the next 6 months, with the first payment made today .what is the effective annual interest rate (EAIR) of the second option? You have two options of paying for your new dishwasher ,you can either make a single payment of $400 today,or you can pay $70 for the next 6 months, with the first payment made today .what is the effective annual interest rate (EAIR) of the second option?

Explanation / Answer

In the second option you are paying a total of 70 x 6 = $420, that is $20 more than the first option. You are paying $20 more for in six months; hence in one year it will be $40. The effective annual interest rate is the percentage of the extra payment made in the second option over the first option.

EAIR = 40 / 400 x 100 = 10%.

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