Michelle has not budgeted wisely. As a result, she needs a quick loan from Rebecca....
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Accounting
Michelle has not budgeted wisely. As a result, she needs a quick loan from Rebecca. Michelle needs $2,000 and Rebecca has agreed to lend her the $2,000 if she makes 12 monthly payments to Rebecca in the amount of $204, to be paid at the end of each month. Because the total amount to be repaid is $2,448, Rebecca points out that the interest rate is 22.4% ($448in interest on a $2,000 principle loan). She acknowledges that the effective annual rate is the true measure of the annualized interest and that it will be slightly higher because the monthly payments imply monthly compounding. However, neither Rebecca nor Michelle knows how to calculate the effective annual rate, so they have turned to you for help. What is the effective annual rate (E.A.R.) on this loan?
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