Suppose you borrow $1000 from a finance student and promise to pay them back within one year. If the interest rate on the loan is 1.25% per month, what is the effective annual interest rate (EAR)?
A) 14.25
B) 10.25
C) 16.075
D) It cannot be determined.

Question

Quizplus · Accepted Answer

The effective annual interest rate (EAR) can be calculated using the formula: EAR = (1 + periodic rate)^n - 1, where the periodic rate is the monthly interest rate (0.0125) and n is the number of periods (12 months). So, EAR = (1 + 0.0125)^12 - 1 = 0.16075 or 16.075%.

Suppose You Borrow $1000 from a Finance Student and Promise