Answer :
Loans A and B met her criteria of maximum effective interest rate of 9.955%
What is effective interest?
Effective interest rate is the annual interest rate which considers the number of times in a year that interest on the loan is compounded.
EAR=(1+APR/n)^n-1
APR=annual percentage rate
n=frequency of compounding in a year
Loan A: 9.265% nominal rate, compounded weekly:
EAR=(1+9.265%/52)^52-1
EAR=9.699%
Loan B: 9.442% nominal rate, compounded monthly:
EAR=(1+9.442%/12)^12-1
EAR=9.862%
Loan C: 9.719% nominal rate, compounded quarterly:
EAR=(1+9.719%/4)^4-1
EAR=10.079%
Only loans A and B met her criteria of maximum effective interest rate of 9.955%
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Full question:
Melanie is looking for a loan. She is willing to pay no more than an effective rate of 9.955% annually. Which, if any, of the following loans meet Melanie’s criteria?
Options:
Loan A: 9.265% nominal rate, compounded weekly
Loan B: 9.442% nominal rate, compounded monthly
Loan C: 9.719% nominal rate, compounded quarterly
Answers:
a. B only
b. A and C
c. A and B
d. None of these fit Melanie’s criteria.