Vito Corleone will loan you money on a "ﬁve-for-six" arrangement; i.e., for every $5 he gives you today, you give him $6 one week from now. What is the APR of this loan?

Question

Quizplus · Accepted Answer

To calculate APR, we need to calculate the interest rate for one week and then annualize it.

Let's say Vito Corleone lends $100. He will receive $120 ($100 initial plus $20 interest) in one week.

Using the simple interest formula: 
I = P*r*t
20 = 100*r*1/52   (note: one week is 1/52 of a year)
r = 10.4

Therefore, the weekly interest rate is 10.4%. To annualize it: 
(1 + 0.104)^52 - 1 = 1,040%

So the APR of this loan is 1,040%. Option D is the correct answer.

Vito Corleone Will Loan You Money on a "ﬁVe-For-Six" Arrangement;