What is the EAR for a $100 loan when the interest is compounded monthly and the stated annual interest rate is 7 percent?
A)7.0 percent
B)8.0 percent
C)7.23 percent
D)12.0 percent
E)16.0 percent

Question

Quizplus · Accepted Answer

We need to use the formula for EAR (Effective Annual Rate) when interest is compounded monthly: EAR = (1 + r/n)^n - 1, where r is the stated annual interest rate and n is the number of times interest is compounded per year.

For this problem, r = 7% and n = 12 (since interest is compounded monthly), so the EAR = (1 + 0.07/12)^12 - 1 = 0.0723, or 7.23%.

Therefore, the best choice is C.

What Is the EAR for a $100 Loan When the Interest