Suppose that Community Bank offers to lend you $10,000 for one year at a nominal interest rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate of the loan?

a. 8.24%

b. 8.45%

c. 8.66%

d. 8.88%

e. 9.10%

a. 8.24%

Explanation:

The formula to compute the effective annual rate of the loan is shown below:

= (1 + nominal interest rate : periods) ^ number of period - 1

= (1 + 8% : 4) ^4 - 1

= (1 + 2%) ^4 - 1

= 1.02^4 - 1

= 8.24%

As the interest rate is made on a quarterly basis and we know that there are four quarters in a year and we take the same in the computation part