Effective interest rate
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What is the effective interest rate for each of the following payment plans, if someone borrows $4,000 at $500 interest for one year?
1. Annual payment
2. Semiannual payments
3. Quarterly payments
4. Monthly payments
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The solution explains how to determine the effective interest rates.
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1. Annual payment
Under annual payment the effective rate is interest / principal amount = 500/4,000=12.5%
2. Semiannual payments
To find the effective interest rate when the ...
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