Question

Venus Inc. recently borrowed $750,000 from its bank at a simple interest rate of 10 percent. The loan is for six months. The loan agreement requires the interest to be added to the amount borrowed and the total amount to be repaid in monthly installments. What is the loan's effective annual rate (EAR)?

Answer 1

To find the loan's effective annual rate (EAR), calculate the amount borrowed after the interest is added and the monthly installment payments. The EAR formula is (1 + Monthly Interest Rate)^12 - 1.

Step-by-step explanation:

To find the loan's effective annual rate (EAR), we need to first calculate the amount borrowed after the interest is added, and then determine the monthly installment payments. The formula to calculate the amount borrowed after six months is:

Amount Borrowed = Principal + (Principal * Interest Rate * Time)

Using the given values, we can substitute them into the formula:
Principal = $750,000
Interest Rate = 10% = 0.10
Time = 6 months

After finding the amount borrowed, we can determine the monthly installment payments by dividing the total amount borrowed by the number of months:

Monthly Installment = Amount Borrowed / Time

Finally, to find the loan's effective annual rate (EAR), we can use the formula:

EAR = (1 + Monthly Interest Rate)12 - 1

Where Monthly Interest Rate = Interest Rate / 12

By substituting the given values, we can calculate the EAR.

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