Question

You are looking to buy a car and you have been offered a loan with an APR of 6.5 %​, compounded monthly. a. What is the true monthly rate of​ interest? b. What is the​ EAR? g

Answer 1

Answer: The answer is given below

Explanation:

a. What is the true monthly rate of​ interest?

The monthly rate of interest will be the annual percentage rate of charge given in the question divided by the number of months. This will be:

= APR/12

= 6.5%/12

= 0.065/12

= 0.0054

= 0.54%

b. What is the​ EAR?

The effective annual rate will be calculated using the formula:

EAR = (1 + (APR / m)^ m) - 1

EAR = (1 + (0.065/ 12)^12) - 1

EAR = [(1 + 0.0054)^12] - 1

EAR = (1.0054)^12 - 1

EAR = 1.06676 - 1

EAR = 0.06676

EAR = 6.68%