Question

If the interest rate on a loan is 1% per month, the effective annual rate of interest is:

Answer 1

Answer:

Effective Rate on a Simple Interest Loan = Interest/Principal = $60/$1000 = 6%

Effective rate on a Loan with a Term of Less Than One Year = $60/$1000 X 360/120 = 18%

Effective rate on a discounted loan = $60/$1,000 - $60 X 360/360 = 6.38%

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Answer 2

Answer:

Hence, effective annual rate of interest is 6.38%

Explanation:

As per the data given in the question,

We have,

Interest rate of loan = 1% per month.

We have to determine the annual effective rate.

Effective Rate on a Simple Interest Loan $= Interest/Principal = \frac{60}{1000}= 6\%$

Effective rate on a Loan with a Term of Less Than One Year $= \frac{60}{1000} \times \frac{360}{120} = 18\%$

Effective rate on a discounted loan $= \frac{60}{1,000} - 60 \times \frac{360}{360} = 6.38\%$