Friendly Credit Corp. wants to earn an effective annual return on its consumer loans of 13 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers?

Question

Quizplus · Accepted Answer

Since the bank uses daily compounding, the annual percentage rate (APR) will be higher than the effective annual return. Using the formula APR = [(1 + r/n)^n - 1] x 100%, where r is the effective annual return and n is the number of compounding periods per year, we can solve for the APR: 
APR = [(1 + 0.13/365)^365 - 1] x 100% = 12.22% 
Therefore, the bank is required by law to report an APR of 12.22% to potential borrowers, even though it earns an effective annual return of 13%.