A.  You need a quick $500 to pay this month's cell phone bill. An Indianapolis "payday" loan company will lend you that amount for one month, charging you a fee of "only" $50 (meaning you pay back $550 in one month). The fee will be due on the day you pay off the loan. Recognizing that the fee is in reality the interest payment, what is the true Effective annual Rate (EAR) on this loan?

B. A baseball player is offered a 5-year, $50 million contract which pays him the following amounts at the end of each year:

Year 1: $6 million 

Year 2: $8 million 

Year 3: $10 million 

Year 4:$12 million 

Year 5: $14 million

Instead of accepting the contract, the player asks for a contract that has the team paying the same total amount, but payments are equal ($10 million a year) and come at the beginning of each year for the 5 years instead of the end of the year (5 total payments). Assuming that the appropriate discount rate is 6% per year, what is the difference in the present value of two offers?

Answer rating: 100% (QA)

The detailed answer for the above question is provided below A Payday Loan To calculate the EAR on a payday loan we can use the following formula EAR ... View the full answer