Question

First National Bank charges 13.9 percent compounded monthly on its business loans. First United Bank charges 14.2 percent compounded semiannually. Calculate the EAR for First National Bank and First United Bank. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

EAR
First National	%
First United	%

As a potential borrower, which bank would you go to for a new loan?

First United bank or First National bank ?

Answer 1

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

EAR for:

First National=[(1+0.139/12)^12]-1

=14.82%(Approx).

First United=[(1+0.142/2)^2]-1

=14.70%(Approx).

Hence First United must be selected having lower EAR.