No Tree Too Tall, Inc.is planning to borrow $12,000 from the bank.The bank offers the choice of a 12 percent discount 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 interest rate on an add-on loan is higher than the nominal rate because interest is calculated on the full principal amount for the entire period, and payments are made periodically. The effective rate can be calculated using the formula for the effective annual rate (EAR) for installment loans, which considers the periodic payments and the fact that the principal is reduced over time. For a 10.19% add-on loan with quarterly payments, the effective rate is approximately 16.99%.