Question

Friendly's Quick Loans, Incorporated, offers you $7.50 today but you must repay $9.85 when you get your paycheck in one week (or else).
a. What is the effective annual return Friendly's earns on this lending business?

Answer 1

Answer:

16.35%

Step-by-step explanation:

To calculate the effective annual return, we first need to find the interest earned over the one-week period and then annualize it.

Interest earned = Repayment amount - Loan amount

= $9.85 - $7.50

= $2.35

Now, to annualize this return, we'll need to consider it as if it were earned repeatedly over a year, assuming the same terms are maintained. Since the loan term is one week, we'll multiply the interest earned by the number of weeks in a year (52 weeks).

Effective Annual Return = (Interest earned / Loan amount) * (Number of weeks in a year)

= ($2.35 / $7.50) * 52

≈ 16.347

So, the effective annual return that Friendly's earns on this lending business is approximately 16.35%.