Answered

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A bank offers to lend you $10,000 for 1 year on a loan contract that calls for you tomake interest payments of $50.00 at the end of each month and then pay off theprincipal amount at the end of the year. What is the effective annual rate on the loan

Sagot :

Answer:

6.17%

Explanation:

The monthly rate of return on the loan is the monthly interest payment on the loan which is $50 divided by the principal amount borrowed.

The monthly rate of interest =$50/$10,000

The monthly rate of interest =0.50%

However, the effective annual rate is the rate of interest on the loan from an annual basis perspective using the formula below:

effective annual rate=(1+monthly interest rate)^n-1

monthly interest rate=0.50%

n=12(the number of monthly compounding in a year is 12)

effective annual rate=(1+0.50%)^12-1=6.17%

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