Question

A loan has a stated annual rate of 17.9%. If loan payments are made monthly and interest is compounded monthly, what is the effective annual rate of interest? (Show your answer to the fourth decimal place, as a decimal, NOT as a percentage. DO NOT round until after all calculations have been completed and you have reached your final answer.)

Answer 1

Solution:
	effective annual rate of interest = 0.1944
Working Notes:
	Effective Annual rate (EAR) = (1+r/m)^m -1
	m is the number of compounding periods per year
	r is the interest rate APR =17.9% = 0.179
	m= 12       when compounded monthly means compounding 12 times per year
	Effective Annual rate (EAR) = (1+r/m)^m -1
	= (1+0.179/12)^12 -1
	=0.194440754
	= 0.1944
Please feel free to ask if anything about above solution in comment section of the question.