Question

Suppose People's bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?a. 13.83%
b. 15.71%
c. 12.35%
d. 13.43%
e. 12.62%

Answer 1

Answer:

10.38%

Explanation:

The formula to compute the effective annual rate of the loan is shown below:

= (1 + nominal interest rate ÷ periods)^ number of period - 1

The nominal interest rate is shown below:

= $250 × 4 ÷ $10,000

= $1,000 ÷ $10,000

= 0.1

Now the effective annual rate is

= (1 + 0.1 ÷ 4)^4 - 1

= (1 + 0.025)^4 - 1

= 1.025^4 - 1

= 10.38%

Since the interest rate is measured on a quarterly basis, we know there are four quarters in a year and we do the same in the calculation part.

This is the answer but the same is not provided in the given options