Your friend wants to borrow $2,500 and pay you back the $2,500 in a year from...

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Finance

Your friend wants to borrow $2,500 and pay you back the $2,500in a year from now. You agree to the loan
but tell your friend he must pay you $500 up-front.
a) What is the annual effffective rate of interest you havecharged your friend?
b) Before your friend agrees to the deal, he gets a letter inthe mail saying he qualifified for a a credit card
from McMaster Bank with a $2,500 limit which charges an annualinterest rate of 25%, per month.
Assuming your friend plans to make no monthly payments, butrather only one payment after 1 year
is up, should your friend take your deal, or use the McMastercredit card instead?
c) Explain, using only words and formulas (no numbers orexamples), why simple interest outperforms com
pounding interest when the investment time is less than 1 year.Your answer should only be a few sentences long.

Answer & Explanation Solved by verified expert

3.6 Ratings (418 Votes)

a Cash flow to you in Year 0 when you pay 2500 to your friend and he gives back 500 upfront payment 2500 500 2000 Cash flow in Year 1 when the friend returns back 2500 2500 Based on the IRR formula in excel Annual effective you are See Answer

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Your friend wants to borrow $2,500 and pay you back the $2,500in a year from now. You agree to the loanbut tell your friend he must pay you $500 up-front.a) What is the annual effffective rate of interest you havecharged your friend?b) Before your friend agrees to the deal, he gets a letter inthe mail saying he qualifified for a a credit cardfrom McMaster Bank with a $2,500 limit which charges an annualinterest rate of 25%, per month.Assuming your friend plans to make no monthly payments, butrather only one payment after 1 yearis up, should your friend take your deal, or use the McMastercredit card instead?c) Explain, using only words and formulas (no numbers orexamples), why simple interest outperforms compounding interest when the investment time is less than 1 year.Your answer should only be a few sentences long.