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13 June, 12:38

A student bought a $75 used guitar and agreed to pay for it with a single $80 payment at the end of 3 months. What is the nominal annual interest rate? What is the effective interest rate?

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  1. 13 June, 13:01
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    29.5%

    Explanation:

    Effective interest rate is the actual interest rate that a investor receives on invesment or a borrower pays on loan including the compounding effect.

    APR = (80 - 75) / 75 = 0.067 = 6.67%

    Effective interest rate = (1 + APR) ^n - 1

    Effective interest rate = (1 + 6.67%) ^4 - 1

    Effective interest rate = (1.0667) ^4 - 1

    Effective interest rate = 1.2947 - 1

    Effective interest rate = 0.2947

    Effective interest rate = 29.5%
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