Your company is considering to take a loan from the local bank. Bank charges a 1.25%...

Your company is considering to take a loan from the local bank.

Bank charges a 1.25% interest rate per quarter.

Then the rate 1.25*4 =5% is called ____

		annual percentage rate
		discount rate
		compound interest rate
		effective annual rate

Expert Solution

Annual percentage rate

The Annual percentage rate is the annualized value of the periodic rate. In this case 1.25% is the rate per quarter. There are 4 quarters in a year. So the Annual percentage rate= Quarterly rate*4

= 1.25%*4= 5%. It is the rate of interest without considering the effects of compounding.

The discount rate is the rate used to bring a future value of money to its present value.

The compound interest rate is the rate charged on interest earned. It is the rate at which the interest is compounded.

The effective annual rate is the real return after taking into account the effects of compounding.

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