Problem 5-15 Calculating APR [LO 4]Vandermark Credit Corp. wants to earn an effective annual return on its consumer loansof 17.25 percent per year. The bank uses daily compounding on its loans.What interest rate is the bank required by law to report to potential borrowers? (Do notround intermediate calculations and enter your answer as a percent rounded to 2decimal places, e.g., 32.16. Use 365 days in a year.)Interest rate%

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Fundamentals of Financial Management (MindTap Course List)

14th Edition

ISBN:9781285867977

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter5: Time Value Of Money

Section: Chapter Questions

Problem 27P: EFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A pays 4% interest compounded annually on deposits,...

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Problem 5-15 Calculating APR [LO 4]
Vandermark Credit Corp. wants to earn an effective annual return on its consumer loans
of 17.25 percent per year. The bank uses daily compounding on its loans.
What interest rate is the bank required by law to report to potential borrowers? (Do not
round intermediate calculations and enter your answer as a percent rounded to 2
decimal places, e.g., 32.16. Use 365 days in a year.)
Interest rate
%

Expert Solution

Step 1

Effective annual interest rate is also called annual rate of return . It is the real return received for the investment. The increase in the compounding period will increases the effective annual rate of return.

It can be calculated using the following formula:

$E f f e c t i v e a n n u a l r a t e = {(1 + \frac{i}{n})}^{n} - 1$

Where,

n = Number of periods

i = Nominal interest rate

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