Question

Friendly’s Quick Loans, Inc., offers you $5.25 today but you must repay $6.55 when you get your paycheck in one week (or else).

a. What is the effective annual return Friendly’s earns on this lending business? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

b. If you were brave enough to ask, what APR would Friendly’s say you were paying? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

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Answer:

n = 1

=> Int rate = (6.55/5.25)- 1

= 0.24762%

N = 52

=> EAR = 1.24762^52 - 1 = 99,142.40%

=> (6.55/5.25 - 1) * 52 = 1287.62%