2. Suppose you borrow $20,000 at an 18 percent simple interest but must repay your loan in 12 equal monthly payments.
a. Find the APR for this loan.
b. What is the corresponding EAR?
| a) The stated rate of 18% is also the APR for this loan as there is NO compound interest. |
| b) Again due to a simple interest case, the Effective rate is interest/ principal (3600/20000) = 18% |
| Since it is a simple interest of 18% on the loan of 20000, Simple interest is calculated on the original principal only |
| Simple interest is = Principal * Rate * Time |
| Since the payments are monthly, 18%/12 = 1.5% is the rate per month |
| 20000 * 1.5% * 12 = 3600 |
| Hnece Amount = Principal + Interest |
| 20000 + 3600 = 23600 |
| This amount of 23600 will be repaid in 12 equal monthly installments |
| ADDITIONAL INFORMATION |
| The formula to calculate Effective annual rate COMPOUND INTEREST IS |
| EAR = (1+i/n)^n - 1 |
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