Answer to Question #12141 in Management for john

Question

3. Riverside 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. Midwest 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 Midwest versus the rate charged by Riverside?
a. 0.52%
b. 0.44%
c. 0.36%
d. 0.30%
e. 0.24%

Answer 1

Correct answer is “D” 0.30%.
Midwest: 50,000 x 1.07 = 53,500 USD. (Annual r=0.07)
Riverside: 50,000*[(1 + 0,065\12)]^12 =53,348 USD. (Annual r = 0.0669)