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If you borrow $6,100 at $510 interest for one year, what is your effective interest rate for the following payment plans? (Input your answers as a percent rounded to 2 decimal places
If you borrow $6,100 at $510 interest for one year, what is your effective interest rate for the following payment plans? (Input your answers as a percent rounded to 2 decimal places.)
Effective Rate of Interest a. Annual payment % b. Semiannual payments ? % c. Quarterly payments ? % d. Monthly payments ? %
Expert Solution
Computation of Effective Interest Rate:
a) Annual Payment:
Effective Interest Rate = Interest / Borrowed Amount
= $510/$6,100
= 8.36%
b) Semiannual Payment:
Effective Interest Rate = (2*Number of Payments*Interest)/((Number of Payments+1)*Borrowed Amount)
= (2*2*$510)/((2+1)*$6,100)
= $2,040/$18,300
= 11.15%
c) Quarterly Payments:
Effective Interest Rate = (2*Number of Payments*Interest)/((Number of Payments+1)*Borrowed Amount)
= (2*4*$510)/((4+1)*$6,100)
= $4,080/$30,500
= 13.38%
d) Monthly Payments:
Effective Interest Rate = (2*Number of Payments*Interest)/((Number of Payments+1)*Borrowed Amount)
= (2*12*$510)/((12+1)*$6,100)
= $12,240/$79,300
= 15.44%
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