The effective annual rate (EAR) for a loan with a stated APR of 10% compounded quarterly is closest to:

Question

Quizplus · Accepted Answer

To calculate the effective annual rate (EAR), we need to take into account the effect of compounding. If the stated APR is 10% compounded quarterly, then the quarterly rate is 10%/4 = 2.5%.

Using the formula for EAR:

EAR = (1 + (APR/m))^m - 1

where:
- APR is the stated annual percentage rate (in decimal form)
- m is the number of compounding periods per year

In this case, we have:

EAR = (1 + (0.10/4))^4 - 1
    = 0.1038 or 10.38%

Therefore, the closest answer choice is A) 10.38%.

The Effective Annual Rate (EAR) for a Loan with a Stated