Multiple Choice
Which one of the following statements correctly applies to a Roth IRA?
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1. Introduction to Accounting
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What is the effective annual interest rate (EAR) on a 9\% APR automobile loan that has monthly payments?
A
8.75\%
B
9.38\%
C
9.72\%
D
9.00\%
Verified step by step guidance1
Understand the concept of Effective Annual Rate (EAR): EAR accounts for compounding within a year, unlike APR which is a simple annual rate. EAR is calculated using the formula: EAR = (1 + r/n)^n - 1, where r is the APR as a decimal, and n is the number of compounding periods per year.
Convert the APR to a decimal: Since the APR is given as 9%, divide it by 100 to get r = 0.09.
Determine the number of compounding periods per year: Monthly payments imply 12 compounding periods per year, so n = 12.
Substitute the values into the EAR formula: Use the formula EAR = (1 + r/n)^n - 1. Replace r with 0.09 and n with 12.
Simplify the expression step by step: First calculate (1 + r/n), then raise it to the power of n, and finally subtract 1 to find the EAR.
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