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Assume you barrow $100,000 for a year and the stated interestrate is 5 percent....

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Accounting

Assume you barrow $100,000 for a year and the stated interestrate is 5 percent. The loan will be st up as an installment loanwith monthly payment. 1) What is the annual percentage rate? 2)Discuss why the annual percentage rate is different then the statedinterest rate.

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Annual percentage rate = [1+i/n]^n   -1         [where n is the number of times interest is compounded in a year]

                =[1+ .05/12]^12    -1

                =[1+ .004167]^12 -1

                = [1.004167]^2    -1

               = 1.0512 - 1

               = .0512 or 5.12%

b)The annual percentage rate is different from stated interest rate due to compounding of interest . The stated interest rate considers the simple interest whereas annual percentage rate considers the compounded interest which is calculated on outstanding amount every time installment is paid .
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In: AccountingAssume you barrow $100,000 for a year and the stated interestrate is 5 percent. The...Assume you barrow $100,000 for a year and the stated interestrate is 5 percent. The loan will be st up as an installment loanwith monthly payment. 1) What is the annual percentage rate? 2)Discuss why the annual percentage rate is different then the statedinterest rate.

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