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First National Bank charges 12

Finance


First National Bank charges 12.4 percent compounded monthly on its business loans. First United Bank charges 12.7 percent compounded semiannually. As a potential borrower, which bank would you go to for a new loan? 

Complete the following analysis. Do not hard code values in your calculations. 
Times compounded Stated rate (APR) per year 
Effective rate (EAR) 
First National Bank 12.4% 12 First United Bank 12.7% 2 
 

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National bank's compounded interest rate= 12.4%

United bank's compounded interest rate= 12.7%

 

EAR= ((1+ (APR/ m))^m)-1

here,

APR= Stated rate

m= no. of compound per year

 

EAR for first national bank;

EAR= ((1+ (12.4%/ 12))^ 12)- 1

= 0.1313 or 13.13%

 

EAR for first United bank;

EAR= ((1+ (12.7%/ 2))^ 2)- 1

= 0.1310 or 13.10%

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