Question

Big Dom’s Pawn Shop charges an interest rate of 27.4 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers.

(a) What rate should the shop report? (Do not round intermediate calcualtions. Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)
(b) What is the effective annual rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

Annual percentage rate: 328.8%

effective rate: 1728%

Explanation:

APR: Annual Percentage Rate

as the month is monthly we must multiply by 12 to convert into annual

27.4 x 12 = 328.8%

The effective rate will have into consideration the compounding effect:

$(1+r_m)^{12}  = 1 + r_e$

$(1+0.274)^{12}  -1 = r_e$

re = 1728%