Question

Paulo took out a $900 loan using an 12% simple interest rate for a period of 9 months. What the effective annual interest rate for the loan? Give your answer as a percentage to the nearest tenth of a percent.

Answer 1

13.2

Explanation:

Answer 2

12.68%

Explanation:

To calculate effective annual interest rate we need to use the following formula:

`i=(1+(r)/(m))^m-1`

Where, 'i' is the effective annual interest rate

'r' is the annual rate of interest

'm' is the frequency of compounding.

When there is continuous compounding the effective annual rate uses the following formula:

`i=e^r-1`

In our case we would are assume that there is continuous compounding since no information regarding the frequency of compounding is given:

Plugging r=12%=0.12, we get:

`i=e^(0.12)-1`

`i=1.1274-1=0.1274`

`i=0.1274`

`i=12.74\%`

Therefore, the effective annual interest rate is 12.74%.