Your friend Suzie has just started a new job as a salesperson for a range of financial products offered by Wagon Financial. To her surprise, customers of Wagon Financial ask her very technical questions about the products she sells. Whilst Suzie has worked in sales before, she is not familiar with the products and has asked for your help to better understand them. The first product Suzie represents is a short term loan. Here, customers can borrow small amounts of money, and have some options for the amount of time to repay the loan. Based on Wagon Financials past experience, the most typical loan amount for customers of this service is $1,250.

The table below shows the repayments for the loan term options available.

2 months $1600

3 months $1650

4 months $1700

Using the information provided, answer the following questions.

c) For a loan of $1,250 with interest of $50 charged in the first month, calculate the equivalent compound effective annual interest rate. (1 mark)

d) You should find that your answer in part c) is larger than your answer in part b). By considering simple and compound interest rates, give an explanation of this difference.