Question

The nominal rate on Sarah’s loan is 7.250%. If the interest is compounded monthly, what rate of interest is Sarah actually paying? a. 7.250% b. 7.496% c. 7.510% d. 8.700% Please select the best answer from the choices provided A B C D

Answer 1

b

Step-by-step explanation:

Answer 2

b. 7.496%

Step-by-step explanation:

Suppose the amount borrowed by the Sarah is $1,000 and its interest rate is 7.250% compounded monthly, the below mentioned amount will have to be paid by the Sarah after one year.

Amount to be paid after one year=1,000(1+7.250%/12)^12

=$1,074.96

Now we have to calculate the effective annual interest rate

interest rate=(1,074.96-1,000)/1,000=7.496%

So based on the above discussion and calculation, the answer is b. 7.496%