Payday loans are very short-term loans that charge very high interest rates. You can borrow $200 today and repay $250 in two weeks. What is the compound annual rate implied by this 25 percent rate charged for only two weeks?

32,987.22 percent

30.00 percent

128.25 percent

26.60 percent

32,987.22 percent

Explanation:

The rate charged for 2 weeks is 25%, which means that after every 2 weeks the interest rate is compounded. Now in order to find the annual compounded rate we will use the formula (1+Weekly return)^Number of compounding periods)-1)

In this case there are around 52 weeks in a year and because interest is compounded every 2 weeks, there will be 26 compounding periods in a year.

So we put these numbers in our formula

((1+0.25)^26-1)=330.8722-1=329.8722

Now in order to find the percentage we will multiply 329.8722 by 100

=32,987.22%

This is our compounded annual rate.

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