Odd Effective Interest Rate Problem

Loan is compounded daily at 5% per week. You borrow $1,000 and make bi-weekly payments to pay off in one year. What is the bi-weekly payment?

First, determine the correct effective interest rate for bi-weekly payments.

Class conversion rule is 7 days = 1 week, 52 weeks = 1 year.

n = 52 weeks/2 weeks = 26 weeks

bi-weekly = 14 days

\begin{align} EIR=\left[1+\left(\frac{0.05}{7}\right)\right]^{14}-1 = 0.1047 \end{align}

Payment=1000 (A\P, i=0.1047, n=26)

(2)\begin{eqnarray} \text{Payment Amount} & = & 1000 \cdot \left(\frac{0.1047 \cdot (1+0.1047)^{26}}{(1+0.1047)^{26}-1}\right)\\ & = & \$113.20 \end{eqnarray}

page revision: 3, last edited: 25 Jul 2016 14:57