Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan

10.38%

Explanation:

From the question above a bank offers to lend an amount of $10,000 for a period of 1 year

The bank expects an interest of $250 to be paid every 4 months

= $250*4

= $1,000

Total amount of interest = $1,000

The first step is to calculate the nominal interest

= (1000/10,000) * 100

= 0.1*100

= 10%

Therefore, the effective annual rate on the loan can be calculated as follows

= (1+r/m) ^m-1

r = 10%, m = 4

= [1 + (10/100) / 4]^-1

=[ (1+0.1/4) ^4]-1

= (1+0.025^4) - 1

= (1.025^4) - 1

= 1.1038-1

= 0.1038*100

= 10.38%

Hence the effective annual rate in the loan is 10.38%