The Smart Bank wants to appear competitive based on quoted loan rates and thus must offer a 7.9 annual percentage rate.What is the maximum rate the bank can actually earn based on the quoted rate?

Question

Quizplus · Accepted Answer

The maximum rate the bank can actually earn based on the quoted rate is known as the EAR (Effective Annual Rate) which takes into account the compounding period. For simplicity, we can assume that the compounding period is annual.

EAR = (1 + quoted rate/1)^1 - 1
    = (1 + 7.9%/1)^1 - 1
    = 8.22%

Therefore, the maximum rate the bank can actually earn is 8.22% and the best choice is (D).

The Smart Bank Wants to Appear Competitive Based on Quoted