Question

Vandermark Credit Corp. wants to earn an effective annual return on its consumer loans of 13.9 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers?

A) 12.43%

B) 13.02%

C) 14.90%

D) 15.72%

E) 16.46%

Answer 1

EAR = (1+APR/m) ^m – 1

APR = m x [(EAR + 1)^1/m – 1]

EAR = Effective annual rate = 0.139

APR = Annual percentage rate or stated rate

m = Annual compounding frequency = 365

APR = 365 x [(0.139 + 1)^1/365 – 1]

       = 365 x [(1.139)^1/365 – 1]

       =365 x [(1.139) ^{0.00273972602739726} – 1]

       = 365 x (1.00035664079893 – 1)

       = 365 x 0.00035664079893

       = 0.13017389161 or 13.02 %

Bank should report APR of 13.02 % compounded daily to potential borrowers.

Hence option “B) 13.02” is correct answer.