Question
Asked Jul 23, 2019
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A bank's loan rate for a machine is 9%. Determine the effective rate on the basis of the compounding period for each rate (assuming compound period is annual).

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Expert Answer

Step 1

The effective interest rate or the effective annual rate (EAR) is the actual rate paid or earned on the loan, an investment, and other financial instruments based on the compounding during the maturity. It is calculated by using the following formula.

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Num ber of compounding periods Annual percentage rate EAR 1+ -1 Number of compounding periods

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Step 2

Calculate the effective ann...

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Num ber of compounding periods Annual percentage rate EAR 1+ -1 Number of compoun ding periods -1 9% 1+ -1 1 = -1.09-1 =0.09 or 9%

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