# Please use the following facts to analyze this next two questions: Assume you just received a...

## Question:

Please use the following facts to analyze this next two questions: Assume you just received a bill for services you and have the following two payment options:

Option 1: Pay the entire bill of $600 now Or Option 2: Pay:$130 now And $130 for each of the next 4 months 1) What annual interest rate (APR) are you paying if you choose Option 2? Assume monthly compounding. Round you answer to the nearest two decimal points. Do not use$, commas or %. For example, 25.34% would be entered as 25.34.

2) What Effective Annual Rate are you paying if you choose Option 2? Assume monthly compounding. Round you answer to the nearest two decimal points. Do not use \$, commas or %. For example, 25.34% would be entered as 25.34.

## Effective Annual Rate

Effective annual rate (EAR) is the interest paid due to the use of compounding over the loan period and it is usually higher than the nominal interest rate or stated interest rate. EAR is usually used in non-collateral loans such as credit cards due to the higher risk the financial institution is entering into.

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To compute for the APR using the below formula:

{eq}Effective~Interest~=~P~*~r~*~\frac{(1~+~r)^n}{(1~+~r)^n~-~1}\\ Whereas:\\ P~=~Present~Value\\ ...