Question
Cowboy hasnt budgeted very well. Therefore, he needs a quick loan from Conor M. So, Cowboy needs $12800 and Conor M has agreed to lend
Cowboy hasnt budgeted very well. Therefore, he needs a quick loan from Conor M. So, Cowboy needs $12800 and Conor M has agreed to lend $12800 if Cowboy makes six payments to Conor M of $2400/month, to be paid at the end of each month. Because the total amount to be repaid is $14400 ($24000x6), Conor M says that he thinks that the interest rate is 12.5% ($1600 in interest on a $12800 loan) and, when pressed, Conor M acknowledges that the effective annual rate is the true measure of the annualized interest and that it might be higher because of compounding. However, neither Conor M nor Cowboy knows how to calculate the EAR of interest for this loan, so they have turned to you for help. [Suggestion: Draw a timeline!] What is the EAR on this loan?
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