You plan to apply for a loan from Bank of America

Finance Sep 09, 2020

You plan to apply for a loan from Bank of America. The nominal annual interest rate for this loan is 10.76 percent, compounded daily (with a 365-day year). What is the effective annual rate, or EAR (annual percentage yield), of this loan?

Expert Solution

Computation of Effective Annual Rate (EAR):

Effective Annual Rate (EAR) = (1+ Stated Nominal Rate/Number of Periods)^Number of Periods - 1

Here,

Stated Nominal Rate = 10.76% or 0.1076

Number of Periods = 365 days

Effective Annual Rate (EAR) = (1+ 0.1076/365)^365 - 1

= (1+0.0003)^365 - 1

= 1.1136 - 1

= 0.1136 or 11.36%

Hence, Effective Annual Rate is 11.36%

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