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27 October, 18:47

Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 6.50%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan? a. 5.39% b. 6.66% c. 8.26% d. 6.73% e. 7.99%

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  1. 27 October, 18:53
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    The correct answer is option (B).

    Explanation:

    According to the scenario, the given data are as follows:

    Loan amount = $10,000

    Nominal annual rate = 6.50%

    Time = 1 year = 4 Quarter

    So, the effective annual rate on the loan can be calculated by using following formula:

    Effective annual rate = (1 + Nominal Rate/Time) ^Time - 1

    = (1 + 6.5%/4) ^4 - 1

    = 6.66%

    Hence, Effective annual rate on the loan is 6.66%.
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