Question

1.12] Anew engineering graduate who started a consult- ing business borrowed money for 1 year to furnish the office. The amount or of10%per year. Hove and it had an interest rate of 10%per year. How- ever, because the new graduate had not built up a credit history, the bank made him buy loan-default insurance that cos 5% of the loan amount. In addi- tion, the bank charged a loan setup fee of $300 hat was the effective interest rate the engineer paid for the loan?

Answer 1

Solution:16.3%

Working:

I = $300 + (0.05 * $23,800) + (0.1 * $23,800)

I = $300 + $1190 + 2380

I = 3,870

Effective interest rate = $3870 / $23800= 16.3%