Question

# 2. Suppose you borrow \$20,000 at an 18 percent simple interest but must repay your loan...

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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