You have agreed to a $40,000 fixed-rate loan from Chase Bank today and promise to repay the loan with 36 equal monthly payments at an APR of 5.50%.What is the EAR of this loan?

Question

Quizplus · Accepted Answer

The EAR (Effective Annual Rate) of the loan can be calculated using the formula:

EAR = (1 + APR/m)^m - 1

where APR is the Annual Percentage Rate and m is the number of compounding periods per year. In this case, APR is 5.50% and there are 12 compounding periods (monthly payments) in a year. Thus,

EAR = (1 + 0.055/12)^12 - 1 
= 0.0564 or 5.64%

Therefore, the best choice is B.

You Have Agreed to a $40,000 Fixed-Rate Loan from Chase