Question

In: Finance

Banks sometimes quote interest rates in the form of “add-on interest.” In this case, if a...

Banks sometimes quote interest rates in the form of “add-on interest.” In this case, if a 1-year loan is quoted with an interest rate of 14.5% and you borrow $1,000, then you pay back $1,116. But you make these payments in monthly installments of $93 each.

a. What is the true APR on this loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Use a financial calculator or Excel.)

b. What is the effective annual rate on the loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Expert Solution

a.

The true APR on loan is calculated below:

b.

The below expression can be used to calculate effective annual rate:

Substitute $93 for monthly payment, 1 for n and 12 for p,

Try i = 22%, Calculate the loan amount and check if it is equal to $1,000.

Try i = 23%, Calculate the loan amount and check if it is equal to $1,000.

Interest rate should lies in between 22% and 23%.

Using interpolation, the effective annual interest rate is calculated below:

So, effective annual rate should be 22.8071%.

jeff jeffy answered 11 hours ago

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