# 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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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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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. help_outlineImage TranscriptioncloseNum ber of compounding periods Annual percentage rate EAR 1+ -1 Number of compounding periods fullscreen
Step 2

Calculate the effective ann... help_outlineImage TranscriptioncloseNum 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% fullscreen

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