The Small Town Bank wants to appear competitive based on quoted loan rates and thus must offer loans at an APR of 7.45%. What is the maximum rate the bank can actually earn based on the APR?

Question

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The APR (Annual Percentage Rate) represents the annual rate charged for borrowing and is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. This rate does not account for compounding within the year. The actual rate the bank can earn, known as the effective annual rate (EAR), can be higher than the APR when interest is compounded more frequently than annually. The formula to calculate EAR from APR is EAR = (1 + APR/n)^n - 1, where n is the number of compounding periods per year. Without the specific number of compounding periods, we cannot precisely calculate the EAR, but it is understood that the EAR will be higher than the APR if there is more than one compounding period per year. Therefore, the maximum rate the bank can actually earn will be higher than the APR of 7.45%, making 7.73% a plausible answer given the options, as it is the only rate higher than the APR but not excessively so.

The Small Town Bank Wants to Appear Competitive Based on Quoted