Introduction to Finance

 17. 
(LO 9.9)
Explain the diff erence between the annual percentage 
rate and the eff ective annual rate.
Exercises
1. 
Go to the Federal Reserve website, http://www.federalreserve.
gov. Go to “Economic Research and Data,” and access “Consumer 
Credit.” Find interest rates charged by commercial banks on new 
automobile loans, personal loans, and credit card plans.
a. 
Compare the current or recent level of interest rates among the 
three types of loans.
b. 
Compare trends in the cost of consumer credit provided by com-
mercial banks over the past three years.
2. 
Go to the Federal Reserve website, http://www.federalreserve.
gov. Go to “Economic Research and Data,” and access “Consumer 
Credit.” Determine current interest rates charged by fi nance compan-
ies versus commercial banks on new automobile loans. Also compare 
the cost of new automobile loans between fi nance companies and 
commercial banks over the past three years.
3. 
Assume that your partner and you are in the consumer lending 
business. A customer, talking with your partner, is discussing the 

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C H A PT E R 9 Time Value of Money
possibility of obtaining a $10,000 loan for three months. The poten-
tial borrower seems distressed and says he needs the loan by tomor-
row or several of his relatively new appliances will be repossessed by 
the manufacturers. You overhear your partner saying that that in order 
to process the loan within one day there will be a $1,000 processing 
fee so that $11,000 in principal will have to be repaid in order to have 
$10,000 to spend now. Furthermore, because the money is needed 
now and is for only three months the interest charge will be 6 percent 
per month. What would you do?
Problems
1. 
Find the future value one year from now of a $7,000 investment at 
a 3 percent annual compound interest rate. Also, calculate the future 
value if the investment is made for two years.