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3 September, 15:57

Your friend tells you that if you let him keep 50 of your Pokemon cards for a month, he will give you 1 card extra when he returns your cards. What is the annual rate of interest he is willing to pay for the borrowed cards? Note: Even though he only keeps your cards for a month, we can still calculate an annual interest rate

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  1. 3 September, 19:55
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    the answer depends on which type of interest we use:

    simple interest rate = 24% compound interest rate = 26.82%

    Step-by-step explanation:

    the interest rate paid for holding the cards one month 1/50 or 2%.

    to convert 2% monthly interest rate to a simple annual rate:

    monthly rate x 12 months = 2% x 12 = 24%

    now to convert 2% monthly interest rate to an annual rate (using compound interest):

    = (1 + r) ⁿ - 1 = (1 + 0.02) ¹² - 1 = 1.2682 - 1 = 0.2682 or 26.82%

    in compound interest, earned interest earns even more interest by itself besides the interest earned by the principal.
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