A local finance company quotes a 16 percent interest rate on one-year loans. So, if you borrow $40,000, the interest for the year will be $6,400. Because you must repay a total of $46,400 in one year, the finance company requires you to pay $46,400/12, or $3,866.67, per month over the next 12 months.

a. What rate would legally have to be quoted?

b. What is the effective annual rate?