Problem 5-50 Effective Interest Rate (LO4)

Banks sometimes quote interest rates in the form of add-on interest. In this case, if a 1-year loan is quoted with a 20.5% interest rate and you borrow $1,000, then you pay back $1,332. But you make these payments in monthly installments of $111 each.

a.	What is the true APR on this loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Use a financial calculator or Excel.)

APR

%

b.	What is the effective annual rate on the loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Effective annual rate

%