Question

OSU evaluated sealed bids on three financing packages for the construction of the new dormitory facility located on Hall of Fame road across from the Colvin Center. The first bid was from GE Capital bank, followed by Wells Fargo Bank with the second bid. The third bid was from Financial Management Corp (FMC). Each institution claims their rates were the best available for the construction project. Answer the next four questions based on the information below: GE Capital Bank Bid #1: 9% per year, compounded quarterly Wells Fargo Bank Bid #2: 3% per quarter, compounded quarterly FMC Bid #3: 8.8% per year, compounded monthly Based on the effective annual interest rates for Bids #1, #2, and #3, which bid would you select for the OSU Dormitory financing plan? GE Capital Bank - Bid #1 Ο Ο Wells Fargo Bank - Bid #2 None of the above, all Bids have equal effective annual interest rates. FMC - Bid #3

Answer 1

Solution

Answer- FMC -Bid#3

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

where i= annual nominal interest rate

n= number of compounding periods in year

FOR GE capital Bank

i= annual nominal interest rate=9%

n= number of compounding periods in year=4 (quaterly compunding)

Effective annual rate=(1+(.09/4))^4-1

=0.093083

=9.3083%

b For Wells Fargo bank

i=3*4=12%

n=4

Effective annual rate= (1+(.12/4))^4-1

=12.5509%

c For FMC

i=8.8%

n=12 (Because monthly compounding

Effective annual rate=(1+(.088/12))^12-1

=0.091638

=9.1638%

Based on these rates since FMC has lowest Effective rate therefore FMC must be chosen

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