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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Business

Simon Mckee

30 July, 08:42

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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Davin · 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%