Question

Joel takes out a loan with a stated rate of 11.85% interest. If the interest is calculated weekly, how much greater is Joel’s effective rate than his stated rate?
a.
0.72 percentage points
b.
0.52 percentage points
c.
0.70 percentage points
d.
0.67 percentage points

Answer 1

Effective annual rate = (1 + 0.1185/52)^52 − 1
= (1 + 0.00227884615)^52 − 1 ≈ 0.125656 ≈ 12.5656%

Difference = 12.5656% − 11.85% ≈ 0.7156 percentage points ≈ 0.72 percentage points.

Answer: a. 0.72 percentage points.