Question

First National Bank charges 14.1 percent compounded monthly on its business loans. First United Bank charges 14.4 percent compounded semiannually. Calculate the EAR for First National Bank and First United Bank. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) EAR First National % First United %

Answer 1

For First National Bank = 15.05%

For first United bank = 14.92%

Explanation:

The computation of EAR for First National Bank and First United Bank is shown below:-

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

as

I indicates the annual interest rate

n indicates the number of the compounding period

For First National Bank

Annual interest rate i = 14.1%

Effective annual rate EAR is

= ((1 + 0.141 ÷ 12)^12) - 1

= 1.1505 - 1

= 0.1505

or

= 15.05%

For first United bank

Effective annual rate EAR is

= (( 1+ 0.144 ÷ 2)^2) - 1

= 1.1492 -1

= 0.1492

or

= 14.92%