Wilma borrows $10,000 from "Jaw Breaker Joe" and promises to repay Joe a total of $10,500 in one month.What is the effective annual interest rate charged by Joe?
A)5.00%
B)60.00%
C)79.59%
D)179.59%

Question

Quizplus · Accepted Answer

The interest charged by Joe is $10,500 - $10,000 = $500. 
The effective annual interest rate can be calculated using the formula: 
Effective Annual Rate = (1 + (Interest / Principal))^n - 1 
where n is the number of times the interest is compounded in a year. 
Since Joe is charging interest for one month, we assume that the interest is compounded once in a month. 
So, plugging in the values we get, 
Effective Annual Rate = (1 + (500 / 10000))^12 - 1 
= 0.07959 or 7.959% 
Therefore, the effective annual interest rate charged by Joe is 7.959% which is approximately equal to 79.59%. 
Hence, the answer is option C.

Wilma Borrows $10,000 from "Jaw Breaker Joe" and Promises to Repay