Luther Industries is offered a $1 million dollar loan for four months at an APR of 9%.If this loan has an origination fee of 1%,then the effective annual rate (EAR)for this loan is closest to:

Question

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B)The origination fee is charged on the principal of the loan.The amount of the fee is equal to .01 × $1,000,000 = $10,000,so that the actual proceeds from the loan = $1,000,000 - $10,000 = $990,000.The interest on the loan equals $1,000,000 × 11ea7cce_3c37_84ef_928c_75e54b097d10_TB1626_11 × 4 months = $30,000 The actual four month interest rate is: 11ea7cce_3c37_ac00_928c_69b4994d0ed2_TB1626_11 - 1 = .040404 or 4.04% Expressing this rate as an EAR gives 1.040404^(12/4) - 1 = .126176 or 12.62%

Luther Industries Is Offered a $1 Million Dollar Loan for Four