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?

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%