This problem illustrates a deceptive way of quoting interest

rates called add$-$on interest. Imagine that you see an advertisement for Crazy Judy$$s Stereo City that

reads something like this: $$$$2,500$ Instant Credit! $17\mathrm{.}5\%$ Simple Interest! Three Years to Pay! Low,

Low Monthly Payments!$$ You$$re not exactly sure what all this means and somebody has spilled ink

over the APR on the loan contract, so you ask the manager for clarification.

Judy explains that if you borrow $$2,500$ for three years at $17\mathrm{.}5$ percent interest, in three years you

will owe

$$2,500\backslash$times $1\mathrm{.}1753$

$=$ $$2,500\backslash$times $1\mathrm{.}622234=$ $$4,055\mathrm{.}59$

Now, Judy recognizes that coming up with $$4,055\mathrm{.}59$ all at once might be a strain, so she lets you

make $$low$,$ low monthly payments$$ of $$4,055\mathrm{.}59/36=$ $$112\mathrm{.}66$ per month, even though this is extra

bookkeeping work for her.

Is the interest rate on this loan $17\mathrm{.}5$ percent? Why or why not? What is the APR on this loan?

What is the EAR? Why do you think this is called add$-$on interest?