Your bank (A) offers you an automobile loan at 12% APR, but the interest rate is...

Question

Question

Your bank (A) offers you an automobile loan at 12% APR, but the interest rate is going to be compounded monthly. What is the EAR that you will be paying?
If another bank (B) offers you a 10% annual rate (APR) and the interest rate is compounded semi- annually. Which of the options will you choose?

Answer 1

Answer #1

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

=[(1+0.12/12)^12]-1

=12.68%(Approx).

b.EAR=[(1+0.1/2)^2]-1

=10.25%(Approx).

Hence Bank B offering 10% APR compounded semi- annually must be chosen having lower EAR.

Answer 2

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