Effective annual rate: Largent Supplies Company has borrowed to invest in a project. The loan calls for a payment of $17,384 every month for three years. The lender quoted Largent a rate of 8.40 per cent with monthly compounding. At what rate would you discount the payments to find amount borrowed by Largent? (Round to two decimal places.)

Question

Quizplus · Accepted Answer

To find the amount borrowed, we need to discount the payments at an effective annual rate. The effective annual rate can be calculated using the formula:

EAR = (1 + r/n)^n - 1

where r is the nominal annual rate (8.4% in this case), and n is the number of compounding periods per year (12 in this case).

EAR = (1 + 0.084/12)^12 - 1
EAR = 0.0873 or 8.73%

Therefore, we would discount the payments at an effective annual rate of 8.73% to find the amount borrowed by Largent.

Effective Annual Rate: Largent Supplies Company Has Borrowed to Invest