Assume You Borrow $100 from a Payday Lender

question 34

Multiple Choice

Assume you borrow $100 from a payday lender. The terms are that you must pay a fee of $25 in advance (today) and one year from now you need to repay $112. What implied interest rate are you paying?

• A) 12.00 percent
• B) 25.00 percent
• C) 49.33 percent
• D) 86.99 percent

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Definitions:

Interest Rate

The annual rate at which interest is charged to the borrower, represented as a percentage of the still unresolved loan amount.

Payment Stream

A sequence of payments made over time, often associated with loans or investments.

Effective Yield

A measure of the return on an investment, taking into account the effect of compounding interest.

Bond Price

The amount of money investors are willing to pay for a bond, which can fluctuate based on interest rates, credit risk, and other factors.