First National Bank charges 14.2 percent compounded monthly on its business loan

Question

First National Bank charges 14.2 percent compounded monthly on its business loans. First United Bank charges 14.5 percent compounded semiannually.

Calculate the EAR for First National Bank and First United Bank. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Calculate the EAR for First National Bank and First United Bank. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

For finding EAR we use the following Equation

EAR = [1 + (APR /m)]m 1

so for each bank EAR is as follows

First National EAR is =[1+(0.142/12)]^12-1=0.1516 or 15.16%

First United EAR is =[1+(0.145/2)]^2-1=0.1503 or 15.03%

From the above we can confer that higher APR does not mean higher EAR it depends on the number of compounidng in a year.

As a potential borrower i should go with First United Bank as it has lesser EAR.

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