Papa bank offers to lend you RM 100,000 at a nominal rate of 5.0%, with interest paid quarterly. Mama Bank offers to lend you the RM 100,000,

Papa bank offers to lend you RM 100,000 at a nominal rate of 5.0%, with interest paid quarterly. Mama Bank offers to lend you the RM 100,000, but it will charge 6.0%, with interest paid at the end to the year. Compute the difference in the effective annual rates charged by these two bank.

Solutions

Expert Solution

Effective interest rate is found as follows:-

Effective rate papa bank = (1 + 0.05/4)⁴ – 1 = 5.1%.

Effective interest rate Mama bank = 6%

Difference in the effective annual rates charged by these two bank = 0.06 - 0.051

Difference in the effective annual rates charged by these two bank = 0.9 %

Nabeel answered 1 year ago

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