Answer:
First National Bank-14.25%
First United Bank-14.17%
As a potential borrower, I would go for First United Bank, as it offers a lower rate, which implies a lower interest cost on the loan.
Explanation:
Effective Annual Rate (EAR) is the equivalent annual interest rate where the interest rate for a transaction is quoted to be compounded for a period shorter that a year.
Usually , where the interest nominal interest rate is quoted to be compounded for a shorter period than a year, the EAR is usually higher. The EAR is computed as follows using this formula:
EAR =( (1+r/m)^(m) - 1 ) × 100
r- nominal interest rate per annum, m- number of compounding periods in a year
So we can compute the EAR for the two banks :
First National Bank:
m= 12 compounding periods in a year
Monthly interest rate = r/m = 13.4%/12 = 0.01116
EAR = (1 + 0.01116)^(12) - 1
= 14.25%
First United Bank:
m = 2 compounding periods in a year
Semi-annual interest rate = 13.7%/2 = 0.0685
EAR = (1+0.0685)^(2) -1
= 14.17%
As a potential borrower, I would go for First United Bank, as it offers a lower rate, which implies a lower interest cost on the loan.
First National Bank-14.25%
First United Bank-14.17%
