This problem illustrates a deceptive way of quoting interest rates called add-on interest . Imagine that you
Question:
Judy explains that if you borrow $2,000 for three years at 17 percent interest, in three years
you will owe:
$2,000 × 1.173 = $2,000 × 1.601613 = $3,203.23
Now, Judy recognizes that coming up with $3,203.23 all at once might be a strain, so she lets you make “low, low monthly payments” of $3,203.23/36 $88.98 per month, even though this is extra bookkeeping work for her.
Is this a 17 percent loan? 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?
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Related Book For
Corporate Finance Core Principles and Applications
ISBN: 978-0077905200
3rd edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford
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