A bank loan agreement calls for an interest rate equal to prime rate p

QUESTION

A bank loan agreement calls for an interest rate equal to prime rate plus 1%. If prime rate averages 9% and non-interest-earning compensating balances equal to 10% of the loan must be maintained, what are the APR and the APY of the loan assuming annual payments?
Annual Percentage Rate(APR): In the context of credit cards, theperiodic rate times the number of periods in a year. Forexample, a 1.5% monthly rate has an APR of 18%. In the contextof consumer lending, the APR takes into account more than theinterest rate applied to the principal per period. APR = Interest rate per period * Number of Periods peryear APR = 10% * 1 Year = 10% Annual Percentage Yield(APY): The APY is the rate actually earned orpaid in one year, taking into account the effect ofcompounding. The APY is calculated by taking one plus theperiodic rate, raising it to the

ber of periods in a year andthen subtracting one. For example, a 1% permonth rate has an APY of 12.68% (1.01 ^12 1) AnnualPercentage Yield(APY) = [1 (i nom / N) N ] 1 i nom is the nominal interest rate N is thenumber of compounding periods per year AnnualPercentage Yield (APY) = [ 1 (0.10 / 1) 1 ] 1 AnnualPercentage Yield (APY) = [(1.1) 1 ] 1 AnnualPercentage Yield (APY) = 0.1 (or) 10%

ANSWER:

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