Question

Mr. Miser loans money at an annual rate of 20 percent. Interest is compounded daily. What is the actual rate Mr. Miser is charging on his loans?

Answer 1

The question is solved by computing the effective annual rate.

The effective annual rate is calculated using the below formula:

EAR= (1+r/n)^n-1

Where r is the interest rate and n is the number of compounding periods in one year.

EAR= (1+0.20/365)^365 - 1

       = 1.2213 - 1

       = 0.2213*100

= 22.13%

Therefore, Mr.Miser is charging 22.13% on his loans.