1) Friendly’s Quick Loans, Inc., offers you $6.00 today but you must repay $7.85
ID: 2776971 • Letter: 1
Question
1) Friendly’s Quick Loans, Inc., offers you $6.00 today but you must repay $7.85 when you get your paycheck in one week (or else). Requirement 1: What is the effective annual return Friendly’s earns on this lending business? If you were brave enough to ask, what APR would Friendly’s say you were paying?
2) Beginning three months from now, you want to be able to withdraw $3,900 each quarter from your bank account to cover college expenses over the next four years If the account pays .79 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next four years?
2) Beginning three months from now, you want to be able to withdraw $3,900 each quarter from your bank account to cover college expenses over the next four years If the account pays .79 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next four years?
Explanation / Answer
Answer-1:
Calculation of effective annual return:
Future value = Present value * (1+r)^n
Future value = $7.85
Present value = $6.00
r = Interest rate per week
n = number of weeks = 1 week
7.85 = 6 * (1+r)^1
(1+r)^1 = 7.85 / 6
(1+r) = 1.30833333
r = 1.30833333 -1
r =0. 30833333
Effective annual rate = (1+0. 30833333 )^52 -1
= 117315853 %
Calculation of APR:
APR = 0. 30833333 *52 = 1603%
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