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Assume you borrow $500 from a payday lender. The terms are that you must pay a fee of $75 in advance (today) and oneyear from now you need to repay $750. What implied interest rate are you paying?A. 43.09%B. 55.78%C. 76.47%D. 81.03%

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Answer:

C. 76.47%

Explanation:

If you have to pay the paylender a fee of $75 in advance, the real present value of the loan is $425 and not $500. If  the future value of the loan, after one year, is $750, the annual interest rate 'r' is determined as follows:

[tex]r= \frac{FV-PV}{PV}\\r=\frac{750-425}{425}\\ r=0.7647=76.47\%[/tex]

You are paying an implied interest rate of 76.47%

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