Question
Use the add-on method for determining interest on a loan of $1230, with an annual rate...
Use the add-on method for determining interest on a loan of $1230, with an annual rate of 7% and a term of 3 years. Then, determine the annual interest rate during the last month of the loan.
During the last month of the loan, the annual interest rate is %?
Homework Answers
Answer #1
Under add on method of loan repayment, The total principal amount and total loan to be repaid over the life of loan is divided by total number of months to determine the monthly loan repayment (Principal + Interest)
CALCULATING INTEREST AMOUNT-
Total Interest amount (for 3 years) = $1,230 * 0.07 * 3 years = $258.3
Total Interest amount (for 1 years)= $258.3 / 3years = $86.1
Total Interest amount (for 1 month)= $86.1 / 12 months = $7.175
CALCULATION OF EFFECTIVE ANNUAL INTEREST RATE-
Effective Annual Interest Rate=
where:
R =Nominal monthly interest rate
n=Number of periods
Effective Annual Interest Rate= 
Effective Annual Interest Rate= 7.23%
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