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Question: Not having had a contract or a "hit" during the last 12 months, Itchy "Fingers" Valachi, the Mafia's chief executioner, needs a loan to pay off the bills his wife has run up at Penney's. He goes to his pal "Hammerhead" the loan shark who loans him exist10,000 for a year. "Hammerhead" tells Itchy, "Since you're my best friend I'm only going to charge you 20% per year so that you will pay only exist2,000 interest for the loan. Of course, I want you to pay the principal plus interest (exist12,000) back in 12 equal end-of-month payments of exist1,000. If you don't make the payments on time you will be dropped into a vat of acid." Happily, Itchy replies "Thanks Hammerhead, you're a pal." What kind of pal is Hammerhead? (Give a quantitative evaluation - what is true effective interest rate per year?)

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M92583695

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