I need help with a finance mba project. Please give me formulas and answers.
It is approximately 9.97%. APR (Annual Percentage rate) is a term that refers the amount of interest a person pays over the course of 365 days on any financial products or loans. In order to calculate the true cost of borrowing the Effective Annual Rate (EAR) is used. This rate takes into consideration the frequency at which interest compounds and the fees that are associated with the loan.
The APR in this example is 9.5%. Continuous compounding means that the interest rate gets calculated continuously and added to the principle balance each time. The formula to calculate the APR is EAR = [(1 + r/n)^n] – 1 where ‘r’ represents the given rate (in this case 9.5%) and ‘n’ represents how often it compounds (infinite in this case due to continuous compounding).
If we plug these values into our formula, the answer is 9.97%. This makes option c right. In other words, someone who was thinking of taking a 9.5% APR loan and compounded it continuously should be expecting their annual effective rate to slightly increase at around 10%.