Solve the problem. Use the approximate APR formula to estimate the APR, and round rates to the nearest tenth of a percent.
-Eddie Hodges buys a complete stereo with CD for $980, paying it off at $46.19 per month for 2 years. What is the approximate APR of the loan?

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Quizplus · Accepted Answer

The approximate APR can be estimated using the formula APR ≈ 2 * n * I / [P(N + 1)], where I is the total interest paid, P is the principal amount (initial loan amount), N is the total number of payments, and n is the number of payments per year. Here, Eddie pays a total of $46.19 * 24 = $1108.56 over 2 years for a $980 stereo, so the total interest I = $1108.56 - $980 = $128.56. With P = $980, N = 24, and n = 12 (monthly payments), the APR ≈ 2 * 12 * 128.56 / [980(24 + 1)] ≈ 12.6%.

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