CFA Practice Question

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CFA Practice Question

You borrow $10,000 at 8% to finance a new car. The loan will be paid back over 3 years of monthly payments. Your effective rate of interest would be closest to ______.

A. 8.00%
B. 8.24%
C. 8.30%
Correct Answer: C

With monthly payments, interest will be charged on a monthly basis. The effective interest rate is the stated rate compounded monthly: r = (1 + 0.08/12)12 - 1

User Contributed Comments 16

User Comment
Pooh Remember EAR accounts for periodic compounding.
jimmymh it's easier if you just plug it in your calculator, 2nd iconv, Nom=8, C/Y=12, Eff=CPT
tcole135 for HP 12c in RPN mode

8 enter

12 n divide i

chs pmt fv
mansi for BA ll plus

2nd iconv
2nd clr work
enter and down arrow
enter and down arrow
enter and down arrow and bring it to EFF
now press compute
HeroEarth Effective annual rate (EAR) is the annual rate of interest that takes full account of compounding within the year.

Will this always be the case? "within the year" always 1? the 3 years from the question threw me off..
Ratego It is always easier to use the calc.but you need to understand the concept of what you are calculating
SANTOSHPRABHU For BAII Plus format to decimals places to 5 or more, 0.08/12=0.0066667 + 1 = 1.0066667 yx 12 = 1.0829995 - 1 = 0.0829995 X 100 = 8.29995 = 8.30%
pokigbo HP12c Platinum keystrokes
12 [N][/][i][CHS][PMT][FV]
alester83 Hero, to answer your question rates are always based on an annual basis. how they are stated will vary depending on the periods (semi, quarterly, etc.)
nabilhjeily i calculated based on 36 that is 3 * 12 and it still worked well
bettywei how to use caculator?
abs013 NOM =8
C/Y = 12*3 = 36
EFF = 8.31

Is this still correct?
012905nv If you were compounding daily, what is the correct way to enter that in the Texas Instrutments BAII? C/Y=365?
ibrahim18 @012985nv, yes 365
Sm7272 @ abs013 : Effective rate is 8.2999.
It is incorrect to consider 36 as no. of periods.
MELONICA Is it incorrect to consider m=36 in the question?
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