Question

If Timmy takes out a loan for $750 for 15 months, but only receives $725 into his bank account, what's the effective interest rate? Give your answer as a percentage to the nearest hundredth of a percent. Do not include the percent symbol in your answer.

Answer 1

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Answer:

  2.76%

Step-by-step explanation:

The effective rate is found by comparing the interest to the proceeds of the loan.

  I = Prt . . . . . . formula for simple interest

  r = I/(Pt)

Here, $25 was paid in interest on loan proceeds of $725. 15 months is 15/12 = 1.25 years. So, the effective rate is ...

  r = 25/(725×1.25) ≈ 0.027586 ≈ 2.76%

The effective interest rate is about 2.76%.