Suppose a bank offers to lend you $10,000 for one year at a nominal annual rate of 10.25%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?
A)7.76%
B)8.63%
C)9.59%
D)10.65%

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) can be calculated when interest is compounded more frequently than annually by using the formula EAR = (1 + i/n)^n - 1, where i is the nominal annual interest rate and n is the number of compounding periods per year. In this case, with a nominal rate of 10.25% and quarterly compounding (n = 4), the EAR is calculated as (1 + 0.1025/4)^4 - 1 = 10.65%.

Suppose a Bank Offers to Lend You $10,000 for One