Question

Since a small company is hard to finance and earn money, a government used to implement various policy
of Inclusive finance to support their operations. In order to support this policy, each bank provide special
borrowing rate for small companies to finance. The borrowing rate is 3% annually compounding, 2.6%
semiannually compounding, 2.8% quarterly compounding, 1.5% semiannual rate, 0.75% quarterly rate for
Bank A, Bank B, Bank C, Bank D, and Bank E respectively. Which bank will support mostly the policy of
Inclusive finance?
A. Bank A
B. Bank B
C. Bank C
D. Bank D
E. Bank E

Answer 1

Calculation of effective rate:

Borrowing Rate

Bank A = 3% P.a

Bank B =

Effective rate = ((1+i/n)^n) - 1

= ((1+0.026/2)^2)-1

= 1.0262-1

= 2.62%

Bank C =  

  Effective rate = ((1+i/n)^n) - 1

= ((1+0.028/4)^4)-1

= 1.0283-1

= 2.83%

Bank D = 1.5% Semiannual rate

= 1.5%*2

= 3%

Bank E = 0.75% quarterly rate

= 0.75%*4

= 3%

Therefore from the above Bank B interest rate is less, Bank B will support mostly the policy of inclusive finance.

The answer is "B"