HW 3
EE366
McCann
Park – 4
th
Edition
Problem 1:
First find the weekly interest rate.
$500 = $58.62(P/A,i
w
,10)
⇒
(P/A,i
w
,10) = 500/58.62 = 8.53; or
$58.62 = $500(A/P,i
w
,10)
⇒
(A/P,i
w
,10) = 58.62/500 = 0.117
Look on the row for 10 periods in the tables in Appendix A and you will find that these values
correspond to 3% interest.
The nominal annual interest rate, r = 52 x i
w
= 52 (0.03) = 156%
The effective annual interest rate = (1+i
w
)
52
– 1 = (1.03)
52
– 1 = 365%
Obviously, a weekly interest rate of 3% corresponds to a very high effective annual interest rate.
Very high effective annual interest rates are not uncommon for small short term loans from
“payday” lenders or pawn shops; although, I madeup this example and it may not correspond to
reality.
4.6:
For the 24 month lease:
P = $2,500 + 520 + 520(P/A, 0.5%, 23) + 500 – 500(P/F, 0.5%, 24)
= $14,348
For the upfront lease:
P = $12,780 + 500 – 500(P/F, 0.5%, 24) = $12,836
At 6% interest, the upfront lease is preferred.
Note:
You could ignore the security deposit entirely since it is identical for the two alternatives.
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 Spring '08
 Pore
 Interest Rates, Annual Percentage Rate, Interest, Internal rate of return

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