1. How do we compute the effective annual interest rate? 2. Will the effective annual rate increase as the frequency of compounding increases? A. The "5-6" scheme availed by a lot of individuals is prohibited by law. This transaction is considered usurious because of the unreasonable interest charged by the creditor to the borrower of the loan. It is called "5-6" because when you borrow 5 pesos, you are required to pay 6 pesos after a month. This translates into a monthly interest rate of 20%. Assuming monthly compounding, what is the effective annual interest rate of this scheme that makes it too much a burden to bear for the borrower?

1. How do we compute the effective annual interest rate? 2. Will the effective annual rate increase as the frequency of compounding increases? A. The "5-6" scheme availed by a lot of individuals is prohibited by law. This transaction is considered usurious because of the unreasonable interest charged by the creditor to the borrower of the loan. It is called "5-6" because when you borrow 5 pesos, you are required to pay 6 pesos after a month. This translates into a monthly interest rate of 20%. Assuming monthly compounding, what is the effective annual interest rate of this scheme that makes it too much a burden to bear for the borrower?

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter5: Time Value Of Money

Section: Chapter Questions

Problem 27P

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The "5-6" scheme availed by a lot of individuals is prohibited by law. This transaction is considered usurious because of the unreasonable interest charged by the creditor to the borrower of the loan. It is called "5-6" because when you borrow 5 pesos, you are required to pay 6 pesos after a month. This translates into a monthly interest rate of 20%. Assuming monthly compounding, what is the effective annual interest rate of this scheme that makes it too much a burden to bear for the borrower?
Hendo Corp. can borrow from its bank using a one year (a) simple interest loan with an 11.3% quoted rate and no compensating balance or (b) a discount interest loan with a quoted rate equal to 9.9% that requires a 15% compensating balance. What is the EAR of the lower cost loan? Hendo Corp. normally tries to keep its checking account balance close to $0.
Suppose that you owe $2,000 on a credit card that charges 18% APR and you pay either the minimum 10% or $20, whichever is higher, every month. How long will it take you to eliminate the debt? Assume that the bank uses the previous-balance method to calculate your interest, meaning that the bank does not subtract the amount of your payment from the beginning balance but charges you interest on the previous balance.
3. Mr. Li borrows from a lending firm an amount of P200,000 with a rate of simple interest of 14% but the interest was deducted from the loan at the time the money was borrowed. If at the end of one year, he has to pay the full amount of P200,000, what is the actual rate of interest?
evergreen credit corp wants to earn an effective annual return on its consumer loans of 18.2 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potenetial borrowers? Explain why this rate is misleading to an uninformed borrower.
Bank A pays 2% interest compoundedannually on deposits, while Bank B pays 1.75% compounded daily.a. Based on the EAR (or EFF%), which bank should you use?b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest.
Come and Go Bank offers your firm a discount Interest loan with an interest rate of 10 percent for up to $26 million, and in addition requires you to maintain a 2 percent compensating balance against the face amount borrowed. What is the effective annual interest rate on this lending arrangement? (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.32.16.)
limits are needed on payday-lending businesses, according to an article in the Feb. 14, 2007 issue of the Columbian. Interest rates on payday loans are so outrageous that the payday-lending industry only has itself to blame for states moving to rein them in. A typical $100 loan is payable in TWO WEEKS at $115. What is the percent interest paid on this loan? Do not round the denominator before dividing.
A bank offers your firm a revolving credit arrangement for up to $86 million at an interest rate of 2.15 percent per quarter. The bank also requires you to maintain a compensating balance of 2 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays 1.50 percent per quarter, and assume that the bank uses compound interest on its revolving credit loans. a. What is your effective annual interest rate (an opportunity cost) on the revolving credit arrangement if your firm does not use it during the year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual interest rate % b. What is your effective annual interest rate on the lending arrangement if you borrow $50 million immediately and repay it in one year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2…
Company A is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or taking out a loan. They owe the supplier $23345, and they can borrow the money from Bank A, which has offered to lend the firm $23345 for 2 month(s) at an APR (compounded) of 15%. The bank will require a (no-interest) compensating balance of 7% of the face value of the loan and will charge a $216 loan origination fee, which means Hand-to-Mouth must borrow even more than the $23345. Compute the EAR of the loan. Give typing answer with explanation and conclusion
Explain the Formula Otherwise I will dislike.. 1) A credit card company charges an interest rate of 1.13% per quarter on the unpaid balance of all accounts. What would be the effective rate of interest per year being charged by the company? The annual effective rate would be 4.52% The annual effective rate would be 4.60% The annual effective rate would be 4.13% The annual effective rate would be 1.13%
3. What are the advantages and disadvantages of a fixed principal, fixed interest loan? 4. What is the purpose of a bridge loan? 5. Distinguish between bank discount and simple interest.6. Differentiate between a stated rate of interest and an effective rate of interest. 7. What is the significance of finding the internal rate of return (IRR)? 8. Jill Kramer borrowed $25,000 to pay for a startup business. Jill must repay the loan at the end of five months in one payment with a 6 percent simple interest rate.What is the total amount that Jill must repay in five months?How much interest does Jill repay?9. Joe Jones went to his bank to find out how long it will take for $1,000 to amount to $1,350 at 9 percent simple interest. Solve Joe's problem.