Payday loans are very short-term loans that charge very high interest rates. You

Question

Payday loans are very short-term loans that charge very high interest rates. You can borrow $400 today and repay $460 in two weeks. What is the compounded annual rate implied by this 15 percent rate charged for only two weeks? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Payday loans are very short-term loans that charge very high interest rates. You can borrow $400 today and repay $460 in two weeks. What is the compounded annual rate implied by this 15 percent rate charged for only two weeks? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Explanation / Answer

The interest rate is compounded every 2 weeks and there are 52 weeks in a year. This implies there are 26 compounding periods in a year.

Assume that you invest $1 for year in this scheme and using the basic time value of money function: FV = PV * (1 + r)n

FV = $1 * (1 + 15%)26

FV = $1 * 37.8568

FV = $37.8568

So, an investment of $1 fetches you $37.8568

Return % = ($37.8568 - $1)/$1 * 100 = 36.8568 * 100 = 3685.68%

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