Payday lenders are firms that make short-term (often one- to two-week) loans to consumers. The intent...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Payday lenders are firms that make short-term (often one- to two-week) loans to consumers. The intent is to provide households with some extra cash in advance of the next paycheck. According to the loan terms, if you obtain a two-week loan of $500, in two weeks (i.e., 14 days), you have to repay $565.45. Questions: (2a) What is your two-week interest charge expressed as a percentage of the loan received? (i.e. your periodic interest rate over the 14-day period)? (2b) If the interest is compounded every 14 days, how many compounding periods do you have in one year (assuming 365 days in a year)?¹ Using this number of compounding periods and the periodic rate for the 14-day loan you found in (2a), calculate the APR of the payday lenders' loan. (2c) Using the number of compounding periods and the APR that you found in (2b), find the Effective Annual Rate (EAR) on this loan. As in (2b), interest is compounded every 14 days and there are 365 days in a year. (2d) Suppose the payday lender charges the same APR as it does right now for a $500 loan, but changes its compounding frequency to daily. Assuming daily compounding (365 days in a year) and the APR found in (2b), what would be the EAR on this loan? Payday lenders are firms that make short-term (often one- to two-week) loans to consumers. The intent is to provide households with some extra cash in advance of the next paycheck. According to the loan terms, if you obtain a two-week loan of $500, in two weeks (i.e., 14 days), you have to repay $565.45. Questions: (2a) What is your two-week interest charge expressed as a percentage of the loan received? (i.e. your periodic interest rate over the 14-day period)? (2b) If the interest is compounded every 14 days, how many compounding periods do you have in one year (assuming 365 days in a year)?¹ Using this number of compounding periods and the periodic rate for the 14-day loan you found in (2a), calculate the APR of the payday lenders' loan. (2c) Using the number of compounding periods and the APR that you found in (2b), find the Effective Annual Rate (EAR) on this loan. As in (2b), interest is compounded every 14 days and there are 365 days in a year. (2d) Suppose the payday lender charges the same APR as it does right now for a $500 loan, but changes its compounding frequency to daily. Assuming daily compounding (365 days in a year) and the APR found in (2b), what would be the EAR on this loan?
Expert Answer:
Answer rating: 100% (QA)
2a The twoweek interest charge on a 500 loan that requires repayment of 56545 is 56545 500 6545 Therefore the twoweek interest charge is 6545 To expre... View the full answer
Related Book For
Principles of Auditing and Other Assurance Services
ISBN: 978-0078025617
19th edition
Authors: Ray Whittington, Kurt Pany
Posted Date:
Students also viewed these finance questions
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
LO 1,3 SPREADSHEET 1: Total net income: $20,600 1: Total assets: $45,000 Preparation and Interpretation of Financial Statements P9. Bachino's Pizza's accounts follow. The company has just completed...
-
The steel plate has thickness t and density . Determine the location of its center of mass. Also compute the reactions at the pin and roller support. Units Used: kN = 103 N Given: t = 0.3 m a = 2 m ...
-
The Arizona Department of Transportation wishes to survey state residents to determine what proportion of the population would like to increase statewide highway speed limits to 75 mph from 65 mph....
-
Explain (a) depositor insurance, (b) lender of last resort, (c) systemically important financial institution.
-
On January 1, 20X3, PURE Products Corporation issued 12,000 shares of its $10 par value stock to acquire the net assets of Light Steel Company. Underlying book value and fair value information for...
-
Identify the true statement regarding frequency of audits. Question 27 options: Fieldwork controls the frequency of audits. All audits should be performed annually and should always be in the same...
-
Figure 4-32 shows a class list for Millennium College. Convert this user view to a set of 3NF relations using an enterprise key. Assume the following: ¢ An instructor has a unique location....
-
A glass binocular lens (nglass = 1.50) is coated with a thin layer of magnesium fluoride MgF2 (nf = 1.38). If the coating is to cause destructive interference in reflected light for l = 560 nm...
-
Why might adding extra pages to the annual report not be beneficial to investors and analysts? What should be management's overriding objective in financial reporting?
-
Name the two types of transactions that increase the owners equity of a corporation.
-
How might management influence a company's current ratio?
-
A business had revenues of \($300,000\) and operating expenses of \($270,000.\) Did the business (a) incur a net loss or (b) realize a net income?
-
The unit of measure concept of accounting requires all business transactions to be recorded in dollars. Does this mean that the accounting system should not record nonfinancial information?
-
Rewrite as a logarithmic equation. 1 0 ^ y = 3
-
Medi-Exam Health Services, Inc. (MEHS), located in a major metropolitan area, provides annual physical screening examinations, including a routine physical, EKG, and blood and urine tests. MEUS's...
-
When using attributes sampling, the auditors must estimate the expected population deviation rate. What sources are used to make this estimate?
-
An auditor may use confirmations of accounts receivable. Reply as to whether the following statements are correct or incorrect with respect to the confirmation process when applied to accounts...
-
In performing a test of controls for sales order approvals, the CPAs stipulate a tolerable deviation rate of 8 percent with a risk of assessing control risk too low of 5 percent. They anticipate a...
-
Prove that if \(x, y>0\) then \(\frac{1}{2}(x+y) \geq \sqrt{x y}\). For which \(x, y\) does equality hold?
-
After a delicious meal at the well-known French restaurant La Racine et Puissance Rationelle, critic Ivor Smallbrain notices that the bill comes to \(x\) pounds, \(y\) pence, where \(x\) and \(y\)...
-
Show that the decimal expression for \(\sqrt{2}\) is not periodic.
Study smarter with the SolutionInn App