Answer (D) is correct . In the absence of a compensating balance provision, the effective annual rate on a loan can be calculated as follows: Effective rate?= Stated rate ÷ (1.0 – stated rate) ?= 12% ÷ (100% – 12%) ?= 12% ÷ 88% ?= 13.64%
Answer (A) is incorrect because The rate of 10.71% results from adding, rather than subtracting, the stated rate to 1.0.
Answer (B) is incorrect because The rate of 12.00% results from failing to divide the stated rate by (1.0 – stated rate).
Answer (C) is incorrect because The rate of 13.20% results from dividing the stated rate by .91 rather than (1.0 – stated rate).
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