Question

In: Finance

If a loan shark offers to give you $5,000 today in return for$8,000 in three...

If a loan shark offers to give you $5,000 today in return for $8,000 in three weeks, what is the implied weekly compound interest rate?

Solutions

Expert Solution

Future Value:

Future Value is Value of current asset at future date grown at given int rate or growth rate.

FV = PV (1+r)^n
Where r is Int rate per period
n - No. of periods

Particulars Amount
Present Value $       5,000.00
Future Value $       8,000.00
Periods 3

Future Value = Cash Flow * ( 1 + r )^n
$ 8000 = $ 5000 ( 1 + r ) ^ 3
( 1 + r ) ^ 3 = $8000 / $5000
( 1 + r ) ^ 3 = 1.6
( 1 + r ) = 1.6 ^ ( 1 / 3 )
( 1 + r ) = 1.1696
r = 1.1696 - 1
r = 0.1696 i.e 16.96 %

Weekly Int rate is 16.96%

Int Rate for 3 Weeks = 16.96% * 3

= 50.88%


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