A student looking at a student loan of a size of $10,000, an interest rate of 9%, and a monthly payment of $127 makes the following observation: The text states that the interest rate on the loan is 9%, but this calculation is obviously wrong. Each monthly payment is $127, so the student will be paying back $127×12 = $1, 524 per year. Therefore, because the principal of the loan is $10,000, the interest rate must be $1,524 = 0.1524, or 15.24%. Briefly explain whether you agree with the student’s reasoning.

A student looking at a student loan of a size of $10,000, an interest rate of 9%, and a monthly payment of $127 makes the following observation: The text states that the interest rate on the loan is 9%, but this calculation is obviously wrong. Each monthly payment is $127, so the student will be paying back $127×12 = $1, 524 per year. Therefore, because the principal of the loan is $10,000, the interest rate must be $1,524 = 0.1524, or 15.24%. Briefly explain whether you agree with the student’s reasoning.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 14P

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A student looking at a student loan of a size of $10,000, an interest rateof 9%, and a monthly payment of $127 makes the following observation:The text states that the interest rate on the loan is 9%, but this calculation is obviously wrong. Each monthly payment is $127, so the student willbe paying back $127×12 = $1, 524 per year. Therefore, because the principalof the loan is $10,000, the interest rate must be $1,524$10,000 = 0.1524, or15.24%.Briefly explain whether you agree with the student’s reasoning.
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