Consider the Case of a Simple One-Period Framework $\times$ 1230% = 00171 = 1

question 44

Multiple Choice

Consider the case of a simple one-period framework. If i = 12.30 per cent and k = 13.87 per cent, what is the risk premium on the corporate loan (round to two decimals) ?

• A) 13.87% - 12.30% = 1.57%.
• B) 13.87% \(\times\) 12.30% = 0.0171 = 1.71%.
• C) 13.87% / 12.30% = 1.13%.
• D) The risk premium equals k = 13.87 per cent.

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Definitions:

Effective Annual Interest Rate

The effective annual interest rate considers the effects of compounding, providing a true reflection of the annual cost of borrowing over a year.

Compounded Monthly

Compounded monthly refers to the way interest is calculated on an investment or loan, with the interest added to the principal each month so that subsequent interest is earned on an increasingly larger base.

Annual Percentage Rate

The annual percentage rate (APR) is the yearly interest rate charged on borrowed money, including any fees or additional costs, providing a comprehensive cost measure.

Interest Per Month

The amount of interest payable each month on a loan, mortgage, or any other financial obligation that incurs interest.