Effective Annual Rate A loan is offered with monthly payments and a 10 percent APR.What is the loan's effective annual rate (EAR)?
A)10.00 percent
B)10.47 percent
C)11.20 percent
D)12.67 percent

Question

Quizplus · Accepted Answer

To calculate the effective annual rate, we need to use 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 = 10% and there are 12 compounding periods (monthly payments) per year. Therefore:
EAR = (1 + 0.1/12)^12 - 1
EAR = 0.1047 or 10.47%

So the best choice is B.

Effective Annual Rate a Loan Is Offered with Monthly Payments