Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?
A)8.24%
B)8.45%
C)8.66%
D)8.88%
E)9.10%

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) can be calculated using the formula: EAR = (1 + i/n)^(n*t) - 1, where i is the nominal rate, n is the number of compounding periods per year, and t is the number of years. Here, i = 0.08, n = 4, and t = 1. EAR = (1 + 0.08/4)^(4*1) - 1 = 0.0824 or 8.24%.

Suppose Community Bank Offers to Lend You $10,000 for One