Suppose you have Sirius XM in your car and you pay Sirius every month FIN. You are offered the following deal:

1) A two-year (24-month) contract with fixed payments at $12/month (i.e., no rate increase for two years), OR

2) Prepaid two years of service equal to $12/month in exchange for a 10% discount equal to $28.80 ($12 x 24 = $288 x 10%). So you would pay $259.20 today ($288 x 90%) and save $12/mo for two years.

Suppose you have enough cash in the bank earning 10 basis points per year and you are not concerned about the quality of service or the financial future of Sirius.

What is the interest rate implicit in this deal and do you have to pay upfront?

Answer rating: 100% (QA)

To determine the interest rate implicit in this deal we need to compare the two options and calculat... View the full answer