First National Bank charges 14.5 percent compounded monthly on its business loan

Question

First National Bank charges 14.5 percent compounded monthly on its business loans. First United Bank charges 14.8 percent compounded semiannually.

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

EAR

  First National

%

  First United

%

First National Bank charges 14.5 percent compounded monthly on its business loans. First United Bank charges 14.8 percent compounded semiannually.

Explanation / Answer

EAR = (1+APR/m)^m   -1

First National Bank EAR = (1+0.145/12)^12    -1

                                                = 1.1550-1

                                                = 15.50%

First United Bank EAR = (1+0.148/4)^4    -1

                                                = 1.1564-1

                                                = 15.64%

I would choose bank with lower EAR. So I would choose First United Bank.

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