Question

# A local finance company quotes a 14 percent interest rate on one-year loans. So, if you...

 A local finance company quotes a 14 percent interest rate on one-year loans. So, if you borrow \$20,000, the interest for the year will be \$2,800. Because you must repay a total of \$22,800 in one year, the finance company requires you to pay \$22,800/12, or \$1,900.00, per month over the next 12 months.

 a. What rate would legally have to be quoted?

 b. What is the effective annual rate?
 Marisol is looking at a one-year loan of \$15,000. The interest rate is quoted as 10 percent plus 4 points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay 4 points to the lender up front and repay the loan later with 10 percent interest.

 What rate would Marisol actually be paying here?

Multiple Choice

• 5.60%

• 14.58%

• 16.04%

• 13.12%

• 10.00%

1)

a)

APR is legally quoted. So, Legally required APR is 14%

b)

Effective annual rate is 27.96% [(1+2.076%)^12-1]

#### Earn Coins

Coins can be redeemed for fabulous gifts.