Final answer:
To calculate the EFFECTIVE ANNUAL RATE (EAR) from a 9.50 percent APR with monthly payments, the formula accounting for monthly compounding must be used, yielding an EAR higher than the APR due to compounding effects.
Step-by-step explanation:
The Effective Annual Rate (EAR) is a representation of the actual annual rate of interest, accounting for the effects of compounding over the period. The APR (Annual Percentage Rate) provides the nominal rate, which in this case is 9.50 percent. However, if the loan involves monthly payments, the monthly compounding must be taken into consideration.
For monthly compounding, the EAR can be calculated using the formula:
EAR = (1 + APR/n)^n - 1
where APR is the annual percentage rate, and n is the number of compounding periods per year.
In this scenario, with monthly payments (n=12), the EAR is calculated as follows:
EAR = (1 + 0.095/12)^12 - 1
This calculation will yield the EAR which is higher than the nominal APR due to the effect of compounding interest monthly.