The Friendly Bank wants to earn an EAR of 12 percent on its consumer loans. The

Question

The Friendly Bank wants to earn an EAR of 12 percent on its consumer loans. The bank uses daily compounding. What rate is the bank most apt to quote on these loans?

34)

A) 11.38 percent B) 11.76 percent C)11.33 percent D) 12.12 percent E) 12.00 percent

35) Assume a 1-year loan for $6,000 has an interest rate of 4.5 percent, compounded annually. How much additional interest would be charged if the rate had compounded continuously rather than annually?

35)

A) $5.84 B) $5.93 C)$6.10 D) $6.17 E) $6.28

Explanation / Answer

1)

EAR = ( 1 + APR/number of periods)number of periods - 1

0.12 = ( 1 + APR / 365)365 - 1

1.12 = ( 1 + APR / 365)365

1.000311 = 1 + APR / 365

0.000311 = APR / 365

APR = 0.1133 or 11.33%

Bank should quote 11.33%.

2)

Interest when compunded annually = 6000 * 0.045 = 270

EAR when compounded continously = e0.045 - 1 = 4.6028%

Interest when compunded continously = 6000 * 0.046028 = 276.17

Additional interest = 276.17 - 270 = $6.17

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.