Question

Payday loans are very short-term loans that charge very high interest rates. You can borrow $200 today and repay $290 in two weeks. What is the compounded annual rate implied by this 45 percent rate charged for only two weeks? (Hint: Compound the 2-week return 26 times for the annual return.) (Do not round intermediate calculations and round your final answer to the nearest whole percent.)

Compounded annual rate ___________

Answer 1

Compounded annual rate=(1+rate)^m-1

where m=compounding periods[52 weeks/2=26]

=(1+0.45)^26-1

which is equal to

=1,568,702%(Approx).