bonus question: what is the effective interest rate if you receive a teaser rate offer for 0% interest rate…

Explanation:

Step1: Assume the principal is $P$.

Let the principal amount be $P$. The interest - free period is 2 years, but there is a 5% transaction fee.

Step2: Calculate the amount paid in terms of the principal.

The amount paid due to the transaction fee is $A=(1 + 0.05)P=1.05P$.

Step3: Use the effective - interest - rate formula.

The effective - interest - rate $r$ is calculated over 2 years. We know that $A = P(1 + r)^n$, where $n = 2$ (number of years). Substituting $A = 1.05P$ and $n = 2$ into the formula $1.05P=P(1 + r)^2$. Divide both sides of the equation by $P$ (since $P\neq0$), we get $1.05=(1 + r)^2$. Then take the square - root of both sides: $1 + r=\sqrt{1.05}$. So $r=\sqrt{1.05}-1$.

Step4: Calculate the numerical value of the effective interest rate.

$r=\sqrt{1.05}-1\approx1.0247 - 1=0.0247$ or 2.47%.

Answer:

2.47%