Problem 5-19 EAR versus APR [LO 4] Ricky Ripov’s Pawn Shop charges an interest r
ID: 2808702 • Letter: P
Question
Problem 5-19 EAR versus APR [LO 4]
Ricky Ripov’s Pawn Shop charges an interest rate of 13 percent per month on loans to its customers. Like all lenders, Ricky must report an APR to consumers.
What rate should the shop report? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Annual percentage rate %
What is the effective annual rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Effective annual rate %
Explanation / Answer
Annual percentage rate = 13% x 12 = 156.00%
Effective annual rate (EAR) = (1 + r/m)m - 1
where, r = annual rate = 156%, m = no. of times compounded in a year = 12
EAR = (1 + 156%/12)12 - 1 = (1 + 13%)12 - 1 = (1.13)12 - 1 = 4.3345 - 1 = 3.3345 or 333.45%