It is the practice of almost all banks in the Philippines that when they grant a loan, the interest for one year is automatically deducted from the principal amount upon release of money to a borrower. Let us therefore assume that you applied for a loan with a bank and the P80,000 was approved at an interest rate of 14% of which P11,200 was deducted and you were given a check of P68,800. Since you have to pay the amount of P80,000 one year after, what then will be the effective interest rate? A. 16.02 % B. 16.28 % C. 16.32 % D. 16.47 %

The correct answer is $\boxed{\text{B) 16.28%}}$.

The effective interest rate is the actual rate of interest paid on a loan, taking into account both the interest rate and any fees or other charges. In this case, the effective interest rate is higher than the stated interest rate of 14% because the interest is deducted from the principal amount before the loan is disbursed. This means that the borrower is effectively paying interest on interest.

To calculate the effective interest rate, we can use the following formula:

Effective interest rate = (1 + (Interest rate / Number of compounding periods per year))^Number of compounding periods per year – 1

In this case, the interest rate is 14% and the number of compounding periods per year is 12. So, the effective interest rate is:

Effective interest rate = (1 + (0.14 / 12))^12 – 1 = 16.28%

Therefore, the effective interest rate on the loan is 16.28%.