Question

John was given a choice of loans of $8,000 with the following characteristics: a) $1,200 in interest paid at the end of the period b) $1,200 in interest paid at the beginning of the period c) $1,200 paid equally over the period with part of the principal retired each month Calculate the interest rate paid. In part (3) calculate using both the approximate method and the actual cost method assuming a one-year loan retired in 12 equal monthly installments of interest and principal.

Answer 1

Answer:

According to each choice, this is the result: a) 15% annual interest rate b) 35,29% annual interest rate and c) 26,62% annual interest rate.

Explanation:

In choice a) you receive 8.000 but paid 9.200 (8.000 capital + 1.200 interest). In choice b) Even though the loan has the same value, you receive 6.800 (8.000 capital -1.200 interest) and you have to pay 9.200 (8.000 capital + 1.200 interest). In choice c) You receive 8.000 but monthly you have to pay $766,67 of instalments for 1 year. So you will pay 9.200 in total at the end (8.000 capital + 1.200 interest) but early payments than choice a) and in finance money is value in time towards the reform and respect of the inmate population.