A bank manager lends a corporate client $1,000,000 for six months. The bank charges a $1,000 fee to set up the loan. The corporate borrower repays $1,050,000 in six months. What is the effective annual rate on the loan?

Question

Quizplus · Accepted Answer

Using the formula for effective annual rate (EAR), the calculation is:

EAR = [(1 + periodic rate)^m - 1]
where periodic rate = (Interest + fee)/principal
m = number of periods per year = 12/6 = 2

Plugging in the numbers:
EAR = [(1 + (50,000/1,000,000 + 1,000)/2)^2 - 1] = 0.1047 or 10.47%

Therefore, the answer is D: 10.47%.

A Bank Manager Lends a Corporate Client $1,000,000 for Six