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A loan is offered with monthly payments and a 15.00 percent APR. what's the loans effective...

A loan is offered with monthly payments and a 15.00 percent APR. what's the loans effective annual rate? (EAR)? do not round intermediate calculations and round your final answer to 2 decimal places.

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Answer #1

The effective rate is the actual rate that is paid annually when the rates are compounded semi-annually, quarterly or monthly. Effective rates are usually higher as compared to the nominal rates in case of more than once compounding in a year. EAR's can be used to compare different loans with varied nominal rates.

The formula for EAR = (1 + r/m)m - 1

r= nominal rate, m= number of months of compounding

EAR = (1 + .15/12)12 - 1

=1.1607545 - 1

= 0.1607545 x 100

= 16.0755%

EAR = 16.08%

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