Question

At the end of 5 days, you repay your 1,000 loan plus50 in interest. What is the effective annual rate (EAR)?

1) 5%
2) 10%
3) 15%
4) 20%

Answer 1

To calculate the effective annual rate (EAR), use the formula: EAR = (1 + Periodic Interest Rate)^(Number of Periods) - 1. In this case, the loan term is 5 days and the periodic interest rate is 5%. The EAR is approximately 214.5%.

Step-by-step explanation:

To calculate the effective annual rate (EAR), we need to use the formula: EAR = (1 + Periodic Interest Rate)^(Number of Periods) - 1. In this case, the loan term is 5 days, so we first need to find the periodic interest rate. The formula for periodic interest rate is: Periodic Interest Rate = Interest / Principal. Therefore, the periodic interest rate is 50 / 1000 = 0.05 or 5%. Now we can calculate the EAR: EAR = (1 + 0.05)^365 - 1. Using a calculator, the EAR is approximately 214.5%.