Your bank offers you a $50,000 line of credit with an interest rate of 2.25% per quarter.What is your effective annual interest rate if you borrow the whole $50,000 for the entire year? Assume that both the funds you borrow and the funds you invest use compound interest.

Question

Quizplus · Accepted Answer

First, we need to find out the quarterly interest rate:

2.25% / 4 = 0.5625%

Then, we can use the formula for effective annual interest rate:

(1 + (0.5625%/100))^4 - 1 = 0.0931 or 9.31%

Therefore, the best choice is B, with an effective annual interest rate of 9.31%.

Your Bank Offers You a $50,000 Line of Credit with an Interest