Rearden Metal has borrowed $4 million for three months at a stated annual rate of 8%,using inventory stored in a field warehouse as collateral.The warehouse charges a $10,000 fee,payable at the end of the quarter.The effective annual rate on this loan is closest to:

Question

Quizplus · Accepted Answer

The effective annual rate is 9.3% because the interest is compounded over the three-month period. The total interest paid is $4 million x 8% x 3/12 = $80,000. The total cost of the loan is $80,000 + $10,000 = $90,000. The effective annual rate is $90,000 / $4 million = 9.3%.

Rearden Metal Has Borrowed $4 Million for Three Months at a Stated