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6 August, 15:34

You have agreed to loan some money to a friend at a simple interest rate of 150% which is outrageous but still about half of the payday loan places! To make it easy on your friend who never took Math 140 you tell him you'll give him some money now and he just needs to pay you back a nice even $500 in 4 weeks. How much money do you hand him?

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  1. 6 August, 15:52
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    We give our friend 437.5 dollars

    Explanation:

    We have to discount from 500 dollar the interest over time, as the 500 is the value our friend will return in 4 weeks (a month) not the amount received Hence:

    nominal x discount rate x time = discount

    being rate and time in the same metric

    rate is annual so we express time in portion of a year

    500 x - 1.5 x 1/12 = - 62,5‬

    We have to discount 62.5 dollar from the nominal

    nominal less discount = present value

    500 - 62.5 = 437.5
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