Tai Credit Corp. wants to earn an effective annual return on its consumer loans of 14.4 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers?

Problem 6-15 Calculating APR [LO4]

Tai Credit Corp. wants to earn an effective annual return on its consumer loans of 14.4 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers? (Use 365 days a year. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Interest rate

%

 

Explanation:

The reported rate is the APR, so we need to convert the EAR to an APR as follows:

EAR = [1 + (APR / m)]m − 1

APR = m[(1 + EAR)1/m − 1]

APR = 365[(1.144)1/365 − 1]

APR = .1346, or 13.46%

This is deceptive because the borrower is actually paying annualized interest of 14.4 percent per year, not the 13.46 percent reported on the loan contract.

   

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

  

Enter				14.4%			365
		NOM			EFF			C/Y
Solve for	13.46%