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A local finance company quotes a 13 percent interest rate on one-year loans. So, if you...

A local finance company quotes a 13 percent interest rate on one-year loans. So, if you borrow $40,000, the interest for the year will be $5,200. Because you must repay a total of $45,200 in one year, the finance company requires you to pay $45,200/12, or $3,766.67, per month over the next 12 months.

   

a. What rate would legally have to be quoted?


  

b. What is the effective annual rate?
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Answer #1

a)

Legally quoted rate is 13%

b)

Hence, Effective annual rate is 25.82% [(1+1.932%)^12-1]

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