Your friend wants to borrow $2,500 and pay you back the $2,500 in a year from now. You agree to the loan

but tell your friend he must pay you $500 up-front.

a) What is the annual effffective rate of interest you have charged your friend?

b) Before your friend agrees to the deal, he gets a letter in the mail saying he qualifified for a a credit card

from McMaster Bank with a $2,500 limit which charges an annual interest rate of 25%, per month.

Assuming your friend plans to make no monthly payments, but rather only one payment after 1 year

is up, should your friend take your deal, or use the McMaster credit card instead?

c) Explain, using only words and formulas (no numbers or examples), why simple interest outperforms com

pounding interest when the investment time is less than 1 year. Your answer should only be a few sentences long.