Question

Rahul needs a loan and is speaking to several lending agencies about the interest rates they would charge and the terms they offer. He particularly likes his local bank because he is being offered a nominal rate of 10%. But the bank is compounding bimonthly (every two months). What is the effective interest rate that Rahul would pay for the loan?
a. 10.603% b. 10.426% c. 10.609% d. 10.285%

Answer 1

Answer:

b. 10.426%

Explanation:

Using the attached formula, convert the nominal rate to effective annual rate

m in the formula is the number of compounding periods per year; 12/2 = 6 in this case.

APR is the nominal rate which is 10%.

Next, plug in the numbers to the formula as shown below;

EAR = $[1+\frac{0.10}{6}]^{6} -1$

EAR = 1.10426-1

EAR = 0.10426 or 10.426% as a percentage

Hence choice B is correct.