CICo. allows you to write a post-dated cheque for 120 INR dated 15 days in the future for which they give you 100 INR today.

CICo. allows you to write a post-dated cheque for 120 INR dated 15 days in the future for which they give you 100 INR today. If you are unable to pay off the loan, the interest is compounded every 15 days in a year. If you are unable to pay off the amount with interest for a year, how much is the amount due from your side to CICo.? What is the APR and EAR of this arrangement?

Expert Solution

To find the interest charged in 15 days;

interest= (final value/initial value)-1= (120/100)-1 =20%

--

if we are not able to pay this amount;

Amount due after 1 year= initial value*(1+interest)^no of half months

=100*(1+20%)^24

=7949.685

--

APR= annualized percentage rate= interest rate*no of half months= 20%*24= 480%

--

EAR= (1+interest rate)^no of half months -1 = (1+20%)^24-1 =7849.68 %

jeff jeffy answered 2 years ago

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