Question

Big Dom’s Pawn Shop charges an interest rate of 26.8 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. What rate should the shop report? What is the effective annual rate?(I current have APR = 321.6? not sure if it is right but get 2.130774 for the EAR ?)

Answer 1

the EAR is 1627.552%

Step-by-step explanation:

The computation of the effective annual rate is shown below:

The annual percentage rate will be

= 26.8% × 12

= 321.6%

Now as we know that

Effective annual rate = (1 + Annual percentage rate ÷ m)^m - 1

where

m = number of compounding periods = 12

So,

Effective annul rate is

= (1 + 0.268)^12 - 1

= 16.275517

= 1627.552%

hence, the EAR is 1627.552%