Question

ou borrow $1,000 from the bank and agree to repay the loan over the next year in 12 equal monthly payments of $90. However, th bank also charges you a loan initiation fee of $25, which is taken out of the initial proceeds of the loan. What is the effective annual interest rate on the loan, taking account of the impact of the initiation fee? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Use a financial calculator or Excel.) Eflective annual interest rate 19.98 %

Answer 1

19.20%

Step-by-step explanation:

For computing the effective annual rate first determine the rate of interest which is shown below;

Given that

NPER = 12

PMT = $90

PV = $1,000 - $25 = $975

FV = $0

The formula is shown below:

= RATE(NPER;PMT;-PV;FV;TYPE)

The present value comes in negative

After applying the above formula, the rate of interest is 1.6097%

Now the effective annual rate is

= (1 + Monthly Interest Rate)^12 - 1

= (1 + 1.6097%)^11 - 1

= 1.016097^11 - 1

= 1.1920291076 - 1

= 19.20%