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In the U.S. one still encounters electronic equipment retailers who quote consumer financing in the following manner: Term of the financing is two years; The
In the U.S. one still encounters electronic equipment retailers who quote consumer financing in the following manner: Term of the financing is two years; The interest rate is 6%; For every $1,000 you purchase on credit, the interest will be 6%2= 12% Therefore, principal plus interest =$1,120; Divided by 24 months means that you must pay $1,120/24=$46.67 per month Since the customer will not be borrowing $1,000 over the life of the financing arrangement, and the quoted interest is charged on the entire $1,000 for two years, the effective must be higher than the quoted rate. a. What is the effective rate per month? b. What is the effective rate per year? c. What is the effective rate per year, on a semi-annually compounded basis
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