You have just received credit card applications from two banks, A and B. The int

Question

You have just received credit card applications from two banks, A and B. The interest terms on your unpaid balance are stated as follows: Bank A: 18% compounded quarterly. Bank B: 17.5% compounded daily. Which of the following statements is incorrect? The effective annual interest rate for Bank A is 19.25%. The nominal annual interest rate for Bank B is 17.5%. Bank B's term is a better deal because you will pay less interest on your unpaid balance. Bank A's term is a better deal because you will pay less interest on your unpaid balance.

Explanation / Answer

a) is correct option as A's effective annual interest rate will be = [1+ (0.18)/4]^4=19.25%

b) is correct option as B's nominal annual rate will be 17.5% as interest rates generally comprises both real interest rate and inflation, unless stated otherwise.

c) is correct option as B's effective annual interest rate is 19.12% ( calculated as equal to [1+(0.175)/365]^365 = 19.12%) which is lower than the A's effective annual interest rate of 19.25%. So B' term is better.

d) is incorrect as A's effective annual rate of 19.25% is higher than B's effective annual rate of 19.12%.

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