Bank One currently charges a 10 percent simple rate on a car loan where the interest is compounded semiannually. Bank Two offers a car loan where the interest is compounded quarterly. What simple rate would Bank Two have to charge in order to earn the same effective annual rate that is earned by Bank One?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Bank One currently charges a 10 percent simple rate on a car loan where the interest is compounded semiannually. Bank Two offers a car loan where the interest is compounded quarterly. What simple rate would Bank Two have to charge in order to earn the same effective annual rate that is earned by Bank One?
| a. |
9.25% |
|
| b. |
10.25% |
|
| c. |
10.42% |
|
| d. |
9.88% |
|
| e. |
10.00% |
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