Compound Frequency Payday loans are very short-term loans that charge very high interest rates. You can borrow $200 today and repay $250 in two weeks. What is the compound annual rate implied by this 25 percent rate charged for only two weeks?

Question

Quizplus · Accepted Answer

The compound annual rate can be calculated using the formula for compound interest: (1 + r/n)^(nt) - 1. Here, r is the interest rate for the period (0.25), n is the number of compounding periods per year (26, since there are 52 weeks in a year and the loan is for 2 weeks), and t is the number of years (1). Plugging in these values gives a very high annual rate, approximately 32,987.22%.

Compound Frequency Payday Loans Are Very Short-Term Loans That Charge