What annual interest rate is implied by your answer to exercise 18.1? You calculate this rate by dividing $10,000 by the difference of $10,000 and the amount you are willing to pay for expedited handling, then taking the result to the twelfth power and subtracting 1. For example, if you were willing to pay $100, the result would be ($10,000/$9,900)12 − 1 = 0.1281781, or 12 percent.

Exercises 18.1

You will receive a $10,000 insurance payment in two months. If you are willing to pay for expedited handling, you can be paid in one month. Would you be willing to pay $50? $100? $200? More?