First National Bank charges 10.6 percent compounded monthly on its business loan

Question

First National Bank charges 10.6 percent compounded monthly on its business loans. First United Bank charges 10.8 percent compounded semiannually.

Calculate the EAR for each bank. (Enter rounded answers as directed, but do not use rounded numbers in intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).)

Calculate the EAR for each bank. (Enter rounded answers as directed, but do not use rounded numbers in intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Suppose the borrowed money is 100 in each case;

1. First national bank charges loan at 10.6 compounded monthly; monthly interest rate will be 10.6/12 = 0.8833

Its compounding monthly so effective payment after one year will be, if borrowed money is 100 :

= 100 (1+ 0.8833/100)12 = 111.13; Interest = final payment - borrowed amount = 111.13-100 = 11.13;

So EAR here is 11.13%

united bank charges 10.8 semi annually compounded; semiannual interest rate will be 10.8/2 = 5.4

So effective annual payment will be, if borrowed money is 100 :

=100 (1+5.4/100) = 111.09;

Interest amount is 11.09;

EAR is 11.09%

AS A POTENTIAL BORROWER WE WILL GO TO THE FIRST UNITED BANK.

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