Question

5.6

Quantitative Problem: Bank 1 lends funds at a nominal rate of 6% with payments to be made semiannually. Bank 2 requires payments to be made quarterly. If Bank 2 would like to charge the same effective annual rate as Bank 1, what nominal interest rate will they charge their customers? Do not round intermediate calculations. Round your answer to three decimal places.

%

Answer 1

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

EAR for Bank 1=[(1+0.06/2)^2]-1

=6.09%

For Bank 2:

0.0609=[(1+APR/4)^4]-1

1.0609=[(1+APR/4)^4]

APR=[(1.0609)^(1/4)-1]*4

=5.956%(Approx).