Question #242345
Bill Baxter has 25000 to invest for a year he can lend it to his sister who has agreed to pay 10% simple interest for the year or he can invest it with a bank at 6 copunded quartly for a year how much additional interest would the simple interest loan to his sister generate find the effective interest rate for both payment
1
Expert's answer
2021-09-27T16:18:49-0400

When he lend it to her sister;

Interest, I=P×R×T100=2500×10×1100=2500I=\frac{P\times R \times T}{100}=\frac{2500\times 10 \times 1 }{100}=2500

When he lend it to the bank;

r=6%/4=1.5%,n=1×4=4,P=25000r=6\%/4=1.5\%, n=1\times 4=4, P =25000

A=P(1+r/100)n=25000(1+1.5/100)4=26534.09A=P(1+r/100)^n=25000(1+1.5/100)^4=26534.09

Interest earned= A-P=26534.09-25000=1534.09

Additional interest earned =2500-1534.09=965.91

Calculation for effective interest rate:

Effective interest rate, r = (1+i/n)n1(1+i/n)^n -1

For the sister r=(1+0.1/4)41=0.1038=10.38%r=(1+0.1/4)^4-1=0.1038=10.38\%

For the bank r=(1+0.06/1)11=0.06=6%r=(1+0.06/1)^1-1=0.06=6\%



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