Do not use the approximation formula for this problem.Coverall Carpets Inc.is planning to borrow $12,000 from the bank.The bank offers the choice of a 12 percent discounted interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments.What is the effective rate of interest on the 10.19 percent add-on loan?
A)9.50%
B)10.19%
C)15.22%
D)16.99%
E)22.05%

Question

Quizplus · Accepted Answer

The effective rate of interest on an add-on loan is higher than the nominal rate because interest is calculated on the original principal for the entire period. The effective rate can be calculated using the formula for the effective annual rate (EAR) considering the quarterly payments, which results in an effective rate of 16.99%.

Do Not Use the Approximation Formula for This Problem