Effective Annual Rate A loan is offered with monthly payments and a 6.5 percent APR.What is the loan's effective annual rate (EAR)?
A)5.69 percent
B)6.697 percent
C)7.28 percent
D)12.63 percent

Question

Quizplus · Accepted Answer

To find the loan's effective annual rate (EAR), we need to account for the fact that interest is being compounded monthly. We can use the following formula:

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

Where APR is the annual percentage rate (in decimal form) and m is the number of compounding periods per year (in this case, 12 for monthly compounding).

Plugging in the numbers, we get:

EAR = (1 + 0.065/12)^12 - 1 
EAR = 0.06697 or 6.697%

Therefore, the best choice is B.

Effective Annual Rate a Loan Is Offered with Monthly Payments