Sprint LTE * 87%- 5:21 PM sjc.cengagenow.com 22-9: The Cost of Bank Loans Proble

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Sprint LTE * 87%- 5:21 PM sjc.cengagenow.com 22-9: The Cost of Bank Loans Problem 22-2 Cost of Bank Loan Mary Jones recently obtained an equipment loan from a local bank. The loan is for $34,000 with a nominal interest rate of 10%. However, this is an installment loan, so the bank also charges add-on interest. Mary must make monthly payments on the loan, and the loan is to be repaid in 1 year. What is the effective annual rate on the loan (assuminga 365-day year)? Round your answer to two decimal places. Do not round intermediate calculations. Check My Work (2 remaining) 0 Icon Key 22-02 Question 2 o

Explanation / Answer

EAR = 19.53%

Total amount repayable = 34000+ 34000*10% = 37400

Monthly instalment = 37400/12 = 3116.67 (PMT)

Computing rate using RATE excel function as = RATE(12,3116.67, -34000) = 1.4977 % per month

APR = 1.4977 *12 = 17.97%

EAR = (1+0.1797/12)^12 -1

= 19.53%

Since the payments are made monthly, the compunding frequency is monthly.

Hence Effective annual rate = (1+r/n)^n -1

= (1+0.1/12)^12 -1

= 10.47%

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