Matt's Machine Company has borrowed $10 million for four months at 5.5% APR,using inventory stored in a field warehouse as collateral.The warehouse fee is 0.5%,payable at the beginning of the loan.What is Matt's EAR?

Question

Quizplus · Accepted Answer

The Effective Annual Rate (EAR) can be calculated by considering the interest rate and the additional costs associated with the loan. In this case, the APR is 5.5%, and there's an additional warehouse fee of 0.5%. The EAR formula considering compounding (which in this case, the compounding effect is minimal since fees are upfront and interest is straightforward) and additional costs gives a higher rate than the nominal APR. The correct calculation involves adjusting for the additional costs and the time period of the loan, leading to an EAR higher than the nominal APR, which is closest to 7.24%.

Matt's Machine Company Has Borrowed $10 Million for Four Months