Southwestern Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Woodburn Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Woodburn versus the rate charged by Southwestern

Question

Business

Jesse Nicholson

28 June, 16:13

Southwestern Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Woodburn Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Woodburn versus the rate charged by Southwestern

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Answers (1)

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Sara Roach · Answer 1

0.03%

Explanation:

Southwestern Bank

The Effective annual interest rate of Southwestern bank compounded monthly would be

First step

Calculation for the Effective annual rate of Riverside Bank:

rR = (1 + (0.065/12)) ^12 = 1.067

Second step

Calculation for the Effective annual rate of Midwest Bank:

rM = (1 + (0.07/1)) ^1 = 1.07

The effective annual rate of Midwest Bank is higher by:

(1.07 - 1.067)

=0.003 % or 0.3%

Therefore the higher or lower is the effective annual rate charged by Woodburn versus the rate charged by Southwestern would be 0.03%