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A Company Borrowed $3100. It Must Make Monthly Payments Of $178.37 For 18 Months To Pay Off The Loan. Use The Constant Ratio Formula To Find The Annual Percentage Rate?

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Connor Sephton answered
The answer to this question, and the other questions found within the same test, can be found online at http://courtneytrabue.com/GMC/135/ch09B.pdf. This worksheet states that the annual percentage rate is 4.51 per cent based on the constant ratio formula.

• Summary of the constant ratio formula

The constant ratio formula is r = 2ml / (P(n+1)) Within the equation; r = interest rate, m = number of payments made per year, l = difference between total paid and principal, P = principal and n = number of payments.

• Constant ratio formula for details in question

Using the information you have given and the details of the constant ratio formula it is possible to make the equation r = 2(12) ((178.37 x 18) - 3100) / (3100 (18) + 1) This gives the result of 0.04509 or 4.51 per cent.

The constant ratio formula is has been used widely within the field of the stock exchange. It is an old formula that has been used for decades. In the more current climate however, the constant ratio formula is used in large investment portfolios managed by the trust departments of investment counselors and commercial banks. Investment professionals specify that the account, agreed within the management contract, will contain certain percentages of bonds and stocks.

Adjustments are made in the disposition of new money, which is added over time. This is instead of buying or selling securities that are already in the portfolio. These exact figures will depend on the needs of the clients, this has the advantage that both the client and the portfolio manager have a clear understanding of the principles that the portfolio is being managed to. This can help prevent any disputes arising later on.

The annual percentage rate for the investment in your question is 4.51 per cent. This is calculated using the constant ratio formula, popular with large investment portfolios.

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