Suppose a bank offers to lend you $10,000 for one year at a nominal annual rate of 10.25%, 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) 7.76%
B) 8.63%
C) 9.59%
D) 10.65%

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) is 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 = 0.1025, n = 4, and t = 1. EAR = (1 + 0.1025/4)^(4*1) - 1 = 10.65%.

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