Question

You are in a dispute with a pay-day lender over the correct interest rate. You had deposited $3,000 with them 2 years ago. Now you have a balance of exactly $7,000. The pay-day lender claims to have paid you an interest rate of 14%. By how many basis points is the pay-day lender misstating the true annual interest rate?

Answer 1

# of years of deposit, NPER Annual deposits, PMT Amount deposited 2 years ago, PV Amount in account now, FV Interest compouding type, TYPE Correct interest rate Pay-day lender's interest rate Excess % misstated by Pay-day lender S0 $3,000 $7,000 0 0 if compounds at the end of of each year; 1 if compounds at the beginning of each year 52.75% Ref: NOTE 14.00% 38.75% [52.75%-14.00%) Excess basis point misstated by Pay-day lender 3,875.25 [38.75%) 0.01%) NOTE One basis point is equal to 1/100th of 196, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument. Rate of return charged by uncle is calculated using EXCEL FUNCTION RATE(nper,pmt, pv,f,type) where nper-2; pmt=0; pv:3000; fv=-7000, type-0; Here value for fv is negative as it denotes cash inflow: pv İS positive as it denotes outflow: type-0 as interest compounds at the end of each year only # of years of deposit, NPER Annual deposits, PMT $0 $3,000 $7,000 Amount deposited 2 years ago, PV 4 Amount in account now, FV 5 Interest compouding type, TYPE 6 Correct interest rate 7 Pay-day lender's interest rate 8 Excess 96 misstated by Pay-day lender O 0 if compounds at the end of of each year; 1 if compounds at the beginning of each year -RATE(B1,B2,B3,-B4,BS) [Ref: NOTE 14.00% -B6B7 [52.75%-14.00%) 10 Excess basis point misstated by Pay-day lender -88/0.01% [38.75%/0.01%)