Question

F10: Effective Annual Rate A loan is offered with monthly payments and a 10.5 percent APR. What's the loan's effective annual rate (EAR)?

11.60%

11.02%

10.02%

16.95%

Answer 1

Answer is 11.02%

Annual interest rate = 10.50%

Monthly interest rate = Annual interest rate / 12
Monthly interest rate = 10.50% / 12
Monthly interest rate = 0.875%

Effective annual rate = (1 + Monthly interest rate)^12 - 1
Effective annual rate = (1 + 0.00875)^12 - 1
Effective annual rate = 1.1102 - 1
Effective annual rate = 0.1102 or 11.02%