A car loan requiring quarterly payments carries an APR of 12%. What is the effective annual...

Question

Question

A car loan requiring quarterly payments carries an APR of 12%. What is the effective annual rate of interest (EAR)? Multiple Choice

11.50%

12.00%

12.56%

13.14%

Answer 1

Answer #1

Effective annual rate (EAR) formula:

EAR APR 1+ a 1

Where,
a = number of quarters in a year

Therefore,

EAR 0.12 1+ 4 -1

= {1 + 0.031 -1

1 = (1.035

= 1.1256

-0.1256

OR

=12.56%

Answer 2

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