Effective annual rate: Raj Krishnan bought a Honda Civic for $17,345. He put down $6,000 and financed the rest through the dealer at an APR of 4.9 percent for four years. What is the effective annual rate (EAR) if the loan payments are made monthly

EAR = 5.01%

Explanation:

Given that

APR = 4.9% = 0.049

Loan amount = initial amount - deposited amount

= 17345 - 6000

= 11,345

PV = 11345

Frequency of compounding, m = 12

Recall that

EAR = (1 + r/m) ^n - 1

Thus,

= (1 + 0.049/12) ^12 - 1

= 1 + 0.049/12^12 - 1

= 1.0501 - 1

= 0.0501 * 100

= 5.01%