1. Your local loan shark offers weekly payday loans: You can borrow $1,000 and pay back $1,020 one week later (or lose a finger or two).

a. What is the effective annual rate on the loan?

b. What is the APR on the loan?

2. The quoted interest rate is 5.6% (APR with quarterly compounding).

a. What is the quarterly rate?

b. What is the effective annual rate (EAR)?

3. The effective annual rate takes _______ into account, while the annual percentage rate takes ________ into account.

compounding, neither compounding nor discounting

discounting, neither compounding nor discounting

compounding, discounting

discounting, compounding

4. Your bank account pays a 8% nominal rate of interest, compounded quarterly. Which of the following statements is correct?

The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.

The periodic rate of interest is 4% and the effective rate of interest is 8%.

The periodic rate of interest is 2% and the effective rate of interest is 8%.

The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.