Unformatted text preview: must make 12 monthly payments of $9,000: PV = ∑ = + 12 1 t t i) (1 PMT 100,000 = ∑ = + 12 1 t t ) i 1 ( 000 , 9 $ Enter in n = 12, PV = 100000, and pmt = 9000 in a financial calculator, we find the monthly rate to be 1.2043%, which converts to an effective annual rate of 15.45 percent: (1.012043) 12 1.0 = 0.1545 = 15.45%, which is close to the 16 percent approximate annual interest rate. If the loan were for 90 days: 1. Simple interest . The brothers would have had to pay (0.08/4)($100,000) = 0.02($100,000) = $2,000 in interest after 3 months, plus repay the principal. In this case the nominal 2 percent rate must be converted to an annual rate, and the effective annual rate is 8.24 percent: EAR simple = (1.02) 4 1 = 1.0824  1 = 0.0824 = 8.24%. In general, the shorter the maturity (within a year), the higher the effective cost of a simple loan. Mini Case: 27  31...
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.
 Spring '08
 Staff
 Interest

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