Question

g A bank offers to lend you for 1 year on a loan contract that calls for you to make interest payments of at the end of each month and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan

Answer 1

Answer: 12.68%

Step-by-step explanation:

First find the nominal interest rate per month:

= Interest payment/Loan

= 100/ 10,000

= 1%

Effective annual rate is:

= (1 + Interest rate per quarter)^no. of compounding periods - 1

= (1 + 1%)¹² - 1

= 12.68%