You are looking to buy a car and you have been offered a loan with an APR of 6.5 % , compounded monthly. a. What is the true monthly rate of interest? b. What is the EAR? g

Answer: The answer is given below

Explanation:

a. What is the true monthly rate of interest?

The monthly rate of interest will be the annual percentage rate of charge given in the question divided by the number of months. This will be:

= APR/12

= 6.5%/12

= 0.065/12

= 0.0054

= 0.54%

b. What is the EAR?

The effective annual rate will be calculated using the formula:

EAR = (1 + (APR / m) ^ m) - 1

EAR = (1 + (0.065 / 12) ^12) - 1

EAR = [ (1 + 0.0054) ^12] - 1

EAR = (1.0054) ^12 - 1

EAR = 1.06676 - 1

EAR = 0.06676

EAR = 6.68%