Do you know how 1300% was derived here. ----------------- A local loan shark offers 4 for 5 on payday. What it involves is that you borrow $4 from him and repay $5 on the next payday (one week later). What would the stated annual interest rate be on this loan, with weekly compunding? What is the effective annual interest rate on this loan? Assume 52 weeks in one year, and select the answer closest to your numbers. Stated Interest Rate Effective Interest Rate A) 25% 300% B) 1,300% 10,947,544% C) 25% 1300% D) 260% 1,312% Your answer: C was incorrect. The correct answer was B) 1,300% 10,947,544% Stated Weekly Rate= 5/4 -1 =25% Stated Annual Rate = 1,300% Annual Effective Interest Rate =(1 + 0.25)52-1 = 109,476.44 - 1 =10,947,544%
25% x 52= 1300%
Its almost the same thing as for a bond. if the semi-annual return on a bond is .3 (3%) then the bond return = 2*3% = 6% because there are two periods in a year.(Bond Equivalent Basis) Here ther are 52 periods in a year and each returns 25% 25% * 52 = 1300%