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12 November, 17:38

You can buy an item for $125 on a charge with the promise to pay $125 in 60 days. Suppose you can buy an identical item for $115 cash. If you buy the item for $125, you are in effect paying $10 for the use of $115 for two months. What is the effective annual rate of interest? Enter your answer as a percentage rounded to two decimal places.

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  1. 12 November, 19:08
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    Effective annual interest rate=0.52%

    Explanation:

    Step 1: Express the formula for calculating interest

    The formula for calculating interest can be expressed as;

    I=PRT

    where;

    P=principal amount borrowed

    R=annual interest rate as a percentage

    T=number of years

    Step 2: Determine the value of the variables P, R and T

    In our case;

    I=$10

    P = (125-10) = $115

    R=unknown=r

    T=2 months=2/12=1/6 years

    replacing in the expression;

    10=115*r * (2/12)

    10 = (230/12) r

    r=10*12/230=0.5217

    0.5217 rounded off to the nearest 2 decimal places is:

    r=0.52%

    Effective annual interest rate=0.52%
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