Assume you barrow $100,000 for a year and the stated interest rate is 5 percent. The...

Assume you barrow $100,000 for a year and the stated interest rate is 5 percent. The loan will be st up as an installment loan with monthly payment. 1) What is the annual percentage rate? 2) Discuss why the annual percentage rate is different then the stated interest rate.

Solutions

Expert Solution

Annual percentage rate = [1+i/n]^n -1 [where n is the number of times interest is compounded in a year]

=[1+ .05/12]^12 -1

=[1+ .004167]^12 -1

= [1.004167]^2 -1

= 1.0512 - 1

= .0512 or 5.12%

b)The annual percentage rate is different from stated interest rate due to compounding of interest . The stated interest rate considers the simple interest whereas annual percentage rate considers the compounded interest which is calculated on outstanding amount every time installment is paid .

ekkarill92 answered 8 months ago

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