Lang National Bank offered a 1-year loan to a commercial customer. The instrument is a discounted note with a nominal rate of 12%. What is the effective interest rate to the borrower?

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%