Before going to Europe on business, a man drove his Rolls Royce to a downtown New York City bank and went in to ask for an immediate loan of $5,000. The loan officer, taken aback, requested collateral, so the man said, “Well then, here are the keys to my Rolls Royce.” The loan officer promptly had the car driven into the bank’s underground parking for safekeeping, and gave him $5,000.
Two weeks later, the man walked through the bank’s doors, and asked to settle up his loan and get his car back. “That will be $5,000 in principal, and $15.40 in interest,” the loan officer said. The man wrote out a check and started to walk away.
“Wait, sir,” the loan officer said. “While you were gone, I found out that you are a millionaire. Why in the world would you need to borrow $5,000?”
The man smiled. “Where else could I park my Rolls Royce in Manhattan for two weeks and pay only $15.40?”
(a) Estimate the equivalent annual interest rate paid by the millionaire in the above example.
(b) Did the bank make a mistake by giving him a loan at that interest rate? Why or why not?
(c) Should the bank go into the business of running a parking garage? Why or why not?

Answer rating: 100% (QA)

a To estimate the equivalent annual interest rate we need to use the formula for annual percentage r... View the full answer