Question

3) First National Bank charges 12.4% compounded monthly on its business loans. First United Bank charges 12.7% compounded semiannually. Find the EAR on both business loans. As a potential borrower, which bank would you go for a new loan?

Answer 1

EAR=[(1+APR/m)^m]-1
where m=compounding periods

EAR for:

First National Bank=[(1+0.124/12)^12]-1

=13.13%(Approx).

First United Bank=[(1+0.127/2)^2]-1

=13.10%(Approx).

Hence as a potential borrower;First United Bank must be selected having lower EAR.