Samira, a trader at Kotokuraba Market, is planning for a bank loan to support he

Question

Samira, a trader at Kotokuraba Market, is planning for a bank loan to support her business. Three banks A, B, and C are ready to grant her the facility. The banks have the following interest rate quotations

Banks                     Stated Rates Compounding
A.                                     5.80% Quarterly
B                                      5.90% Semiannually
C                                      5.85% Monthly

Required:
As a financial analyst, she has consulted you to help her compare the interest rates of the above one year loan facility. Which of the banks offer the best option for her?

Explanation / Answer

EAR=(1+APR/m)^m-1
where m=compounding periods

A:

EAR=(1+0.058/4)^4-1

=5.93%(Approx)

B:

EAR=(1+0.059/2)^2-1

=5.99%(Approx)

C:

EAR=(1+0.0585/12)^12-1

=6.01%(Approx).

Hence A is the best option for Samira having lowest EAR.

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