Banks sometimes quote interest rates in the form of \"add-on interest.\" In this

Question

Banks sometimes quote interest rates in the form of "add-on interest." In this case, if a 1-year loan is quoted with a 20% interest rate and you borrow $1,000, then you pay back $1,200. But you make these payments in monthly installments of $100 each.

PLEASE HELP ME FIND B. - EFFECTIVE ANNUAL RATE.

a. What is the true APR on this loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Use a financial calculator or Excel.) APR 35.11 % b. What is the effective annual rate on the loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Effective annual rate 0

Explanation / Answer

Effective annual rate is calculate by

Effective Rate = (1 + Nominal Rate / n)n - 1

= (1+0.2/12)12 -1 = 0.2194 = 21.94%

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