Assume you just received a bill for services you and have the following two paym

Question

Assume you just received a bill for services you and have the following two payment options:

Option 1:

Pay the entire bill of $600 now

Or

Option 2:

Pay:

$130 now

    And

$130 for each of the next 4 months

What annual interest rate (APR) are you paying if you choose Option 2? Assume monthly compounding. Round you answer to the nearest two decimal points. Do not use $, commas or %. For example, 25.34% would be entered as 25.34.

What Effective Annual Rate are you paying if you choose Option 2? Assume monthly compounding. Round you answer to the nearest two decimal points. Do not use $, commas or %. For example, 25.34% would be entered as 25.34.

Explanation / Answer

Formula to Calculate Interest = E = P x r x (1 + r)n / [(1+r)n - 1]

E = Monthly Installment = $130,   P = Principal = 470 (600 - 130)

r = ?

n = Time = 4 months

130 = 470 x r x (1+ r)4 / [(1 + r)4 - 1]

r = 50.04

So, the Interest Rate is 50.04

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