If a bank charges prime plus 2 percent per year on its loans, the prime rate is 3 percent, and interest is compounded quarterly, the effective annual interest cost on these loans is closest to:

Question

Quizplus · Accepted Answer

The effective annual interest cost is the annual percentage rate (APR) that would result in the same total interest paid over the life of the loan as the stated interest rate compounded quarterly. The formula for the APR is:APR = (1 + (Stated rate / n))^n - 1where:Stated rate is the stated interest rate per yearn is the number of compounding periods per yearIn this case, the stated rate is 3% + 2% = 5%, and n is 4 (since interest is compounded quarterly). Plugging these values into the formula, we get:APR = (1 + (0.05 / 4))^4 - 1 = 0.0509 = 5.09%Therefore, the effective annual interest cost on these loans is closest to 5.09%.

If a Bank Charges Prime Plus 2 Percent Per Year