Skip Towne goes into Frank's Friendly Furniture Sales and purchases a living room set and bedroom...

Question:

Skip Towne goes into Frank's Friendly Furniture Sales and purchases a living room set and bedroom suite for $1,950 total. Skip has to make payments of $100 per month for 36 months. What EAR is Skip paying to buy his furniture?

a. 36.79%

b. 45.35%

c. 56.07%

d. 68.21%

e. None of the above

EAR:

EAR stands for effective annual rate. The EAR is usually different from the stated interest rate on a loan because the EAR takes into account the intra-year compounding of interest payments.

Answer and Explanation:

Since the loan features monthly payments, we have to find the monthly interest rate first.

Let,

  • PMT = monthly payment,
  • n = number of months,
  • r =...

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Effective Annual Rate: Formula & Calculations

from Business 110: Business Math

Chapter 7 / Lesson 6
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