Question

Elliott Credit Corp. wants to earn an effective annual return on its consumer loans of 11 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers?

Answer 1

Answer:

10.29 %

Explanation:

The interest rate that is required by the bank by the law to report to potential borrowers can be calculated by the following expression.

Interest rate to be reported = $[(1+EAR)^{1/n}-1]*n$

where

EAR = effective annual return rate = 11% = 0.11

n = number of days in a year = 365 days

replacing our values into the above equation; we have:

⇒ $[(1+0.11)^{1/365}-1]*365$

= $[1.11^{(0.0027)}-1]*365$

= $[1.00028182-1]*365$

= $2.81811743*10^{-4}$

= 0.1029

= 10.29 %

Thus, the interest rate  the bank is required by law to report to potential borrowers = 10.29%