Question

First National Bank charges 11.4 percent compounded monthly on its business loans. First United Bank charges 11.6 percent compounded semiannually. Calculate the EAR for each bank.

Answer 1

EAR = (1 + APR/m)^m - 1. Where m = compounding periods

First National Bank

11.4 percent compounded monthly on its business loans

EAR = (1+11.4%/12)^12 - 1

EAR = (1.0095)^12 - 1

EAR = 1.12014921627 - 1

EAR = 0.12014921627

EAR = 12.014921627%

EAR = 12.01%

First United Bank

11.6 percent compounded semiannually

EAR = (1+11.6%/2)^2 - 1

EAR = (1.058)^2 - 1

EAR = 1.119364 - 1

EAR = 0.119364

EAR = 11.9364%

EAR = 11.94%