Bank A offers to lend you money at 10 percent compounded monthly, Bank B at 11 p

Question

Bank A offers to lend you money at 10 percent compounded monthly, Bank B at 11 percent compounded quarterly, and Bank C at 12 percent compounded annually. Calculate the effective rates and state which bank offers the lowest cost of borrowed capital.


What is the effective rate for Bank A?
A. 12%
B. 11.46%
C. 10%
D. 10.47%
E. None of the above:


What is the effective rate for Bank B?
A. 12%
B. 11.46%
C. 10%
D. 10.47%
E. None of the above



What is the effective rate for Bank C?
A. 12%
B. 11.46%
C. 10%
D. 10.47%
E. None of the above


Bank A has the lowest cost of borrowed capital?
A. True
B. False

Explanation / Answer

i = ( 1 + ( r / m ) )m - 1 is the effective rate, where m is the compounding period i.e. 12 for monthly, 4 for quarterly and 1 for yearly.

1) 10.47%

2) 11.46%

3) 12%

4) True. It has the lowest cost of borrowed capital. 10.47%

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