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29 November, 05:12

You are looking to buy a car and you have been offered a loan with an APR of 5.7 % , compounded monthly. a. What is the true monthly rate of interest? b. What is the EAR?

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  1. 29 November, 05:22
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    Monthly Interest rate = 0.475%

    EAR = 5.85%

    Explanation:

    a.

    APR = 5.7%

    Monthly Interest rate = APR / n

    Monthly Interest rate = 5.7% / 12

    Monthly Interest rate = 0.475%

    b.

    APR = 5.7%

    m = 12

    EAR = [ (1 + (APR / m)) ^m] - 1

    EAR = [ (1 + (0.057 / 12)) ^12] - 1

    EAR = [ (1 + 0.00475) ^12] - 1

    EAR = [ (1.00475) ^12] - 1

    EAR = 1.0585 - 1

    EAR = 0.0585

    EAR = 5.85%

    True monthly rate of interest is 0.475%

    EAR is 5.85%
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