ECON 435: Sample interest problem

ECON 435 > ECON 435: Sample interest problem

EAR, APR, & simple interest problem

You borrow $1,000 today at 12% SIMPLE INTEREST / year for three years. You will owe $1,000 + $1,000(0.12)(3) = $1,360
To "make it easy on you", you make 36 low payments of $1,360 / 36 = $37.78
Is this a 12% loan?
- $1,000 = $37.78 x (1-1/(1+r)^36)/r
- r = 1.767% / month
- APR = (12*1.767) = 21.204%
- EAR = 1.01767^12-1 = 23.39%!