A farmer is planning to borrow $6,900 for a year. Bank A has an interest rate of
ID: 2787728 • Letter: A
Question
A farmer is planning to borrow $6,900 for a year. Bank A has an interest rate of 10.22% compounded quarterly. While Bank B has an interest rate of 8.13% compounded annually.
(i) Calculate the amount of interest paid to Bank A.
a. $732.87 b. $807.78
c. $807.89 d. $657.95
e. None of the answers are correct
Enter your response here
(ii) Calculate the amount of interest paid to Bank B.
a. $606.68 b. $606.60
c. $560.99 d. $515.38
e. None of the answers are correct
Enter your response here
(iii) Calculate the effective interest rate at Bank A.
a. 11.71% b. 10.62%
c. 9.54% d. 21.93%
e. None of the answers are correct
Enter your response here
(iv) Calculate the effective interest rate at Bank B.
a. 8.13% b. 7.47%
c. 8.79% d. 17.70%
e. None of the answers are correct
Enter your response here
(v) Which loan has the least cost?
a. A b. B
Enter your response here
Explanation / Answer
Value of loan = $6,900
Rate offered by Bank A = 10.22% compounded quarterly
So, effective annual rate = [(1 + 10.22% / 4) ^ 4] - 1
= 1.1062 - 1
= 10.62%
Effective annual rate offered by Bank A is 10.62%.
a.
Amount of interest by banK A = $6,900 × 10.22%
= $732.87.
Annual Interest to bank A is $732.87.
Option (A) is correct answer.
2.
Bank B offer 8.13% interest rate compounded annually.
Total Interest to bank B = $6,900 × 8.13%
= $560.99
Interest paid to bank B is $560.99.
Option (C) is correct answer.
3.
Effective rate of bank A is 10.62%. (calculated earlier)
Option (B) is correct answer.
4.
Bank B offer 8.13% interest rate compounded annually. So effective rate of bank B is 8.13%.
Option (A) is correct answer.
5. since, interest paid to Bank B is less than interest paid to Bank A. So bank B provide least cost.
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