Question

Your friend tells you that if you let him keep 50 of your Pokemon cards for a month, he will give you 1 card extra when he returns your cards. What is the annual rate of interest he is willing to pay for the borrowed cards? Note: Even though he only keeps your cards for a month, we can still calculate an annual interest rate

Answer 1

the answer depends on which type of interest we use:

• simple interest rate = 24%
• compound interest rate = 26.82%

Explanation:

the interest rate paid for holding the cards one month 1/50 or 2%.

to convert 2% monthly interest rate to a simple annual rate:

monthly rate x 12 months = 2% x 12 = 24%

now to convert 2% monthly interest rate to an annual rate (using compound interest):

• = (1 + r)ⁿ - 1
• = (1 + 0.02)¹² - 1 = 1.2682 - 1 = 0.2682 or 26.82%

in compound interest, earned interest earns even more interest by itself besides the interest earned by the principal.