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    Calculating the effective annual interest rate

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    If you barrow $4,000 at $500 interest for one year, What is your effective interest rate for the following payment plans?

    a. Annual payment.
    b. Semiannual payment.
    c. Quarterly payment.
    d. Monthly payment.

    © BrainMass Inc. brainmass.com December 24, 2021, 10:23 pm ad1c9bdddf
    https://brainmass.com/business/interest-rates/calculating-the-effective-annual-interest-rate-471079

    SOLUTION This solution is FREE courtesy of BrainMass!

    If you barrow $4,000 at $500 interest for one year, What is your effective interest rate for the following payment plans?

    a. Annual payment.
    Annual number of payments=1
    Interest=$500
    Total number of payments=1
    Principal=$4000

    Effective interest rate=(2*Annual number of payments*Interest)/((Total number of payments+1)*Principal)
    =(2*1*500)/((1+1)*4000)=12.5%

    b. Semiannual payment.
    Annual number of payments=2
    Interest=$500
    Total number of payments=2
    Principal=$4000

    Effective interest rate=(2*Annual number of payments*Interest)/((Total number of payments+1)*Principal)
    =(2*2*500)/((2+1)*4000)=16.67%

    c. Quarterly payment.
    Annual number of payments=4
    Interest=$500
    Total number of payments=4
    Principal=$4000

    Effective interest rate=(2*Annual number of payments*Interest)/((Total number of payments+1)*Principal)
    =(2*4*500)/((4+1)*4000)=20.00%

    d. Monthly payment.
    Annual number of payments=12
    Interest=$500
    Total number of payments=12
    Principal=$4000

    Effective interest rate=(2*Annual number of payments*Interest)/((Total number of payments+1)*Principal)
    =(2*12*500)/((12+1)*4000)= 23.08%

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 10:23 pm ad1c9bdddf>
    https://brainmass.com/business/interest-rates/calculating-the-effective-annual-interest-rate-471079

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