Question
5. You borrow B dollars from your bank, which adds on the total interest before computing the monthly payment (add-on interest). Thus, if the quoted
5. You borrow B dollars from your bank, which adds on the total interest before computing the monthly payment (add-on interest). Thus, if the quoted nominal interest rate (annual percentage rate is r% and he loan is for N months, the total amount that you agree to repay is B +B(N/12)(r/100) This is divided by N to give the amount of each payment, A. A=B(1/N + r/1200)
This is called an add-on loan. But the true rate of interest that you are paying is somewhat more than r%, because you do not hold the amount of the loan for the full N months.
a. Find the equation to determine the true rate of interest I per month.
b. Plot the relationship between r and I as a function of N.
c. For B=$10,000, N=36 months, and r=8%, find the effective annual borrowing rate per year.
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