Imagine that you see an advertisement for Manic Wesley's Used Car Emporium that reads something like this: "\($10,000\) Instant Credit! Seven Years to Pay! Low, Low Monthly Payments: Only \($231.99\) per Month!" You're not exactly sure how these payments were computed, and somebody has spilled ink over the APR on the loan contract, so you ask the manager for clarification. Wesley explains that if you borrow \($10,000\) for seven years at 10 percent interest, in seven years you will owe \($10,000\) x (1.10)⁷ = \($19,487.17.\)

Now, Wesley recognizes that coming up with \($19,487.17\) all at once might be a strain, so he lets you make "low, low monthly payments" of \($19,487.17/84\) = \($231.99\) per month, even though this is extra bookkeeping for him.

What is the Effective Annual Rate (EAR) on this loan?

a. 1.8026%

b. 10.0000%

c. 21.6317%

d. 23.9106%