Friendly’s Quick Loans, Inc., offers you “ten for thirteen or I knock on your do

Question

Friendly’s Quick Loans, Inc., offers you “ten for thirteen or I knock on your door.” This means you get $10.00 today and repay $13.00 when you get your paycheck in one week (or else).

If you were brave enough to ask, what APR would Friendly’s say you were paying? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What’s the effective annual return Friendly’s earns on this lending business? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Friendly’s Quick Loans, Inc., offers you “ten for thirteen or I knock on your door.” This means you get $10.00 today and repay $13.00 when you get your paycheck in one week (or else).

Explanation / Answer

Return of one week = 13 - 10 = $3

Percentage return of one week = $ 3 *100 / $ 10.00 = 30.00%

Assuming 52 weeks in an year Effective APR/Effective annual return = (1 + 30.00%) ^52 -1 = (1.30)^52 -1

= 84150.038% -1 = 84149.938 %

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