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Edmonton Bank offers to lend you $10,000 at a nominal rate of 6.4%, compounded monthly. The...

Edmonton Bank offers to lend you $10,000 at a nominal rate of 6.4%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Calgary Bank also offers to lend you the $10,000, but it will charge an annual rate of 6.4%, with no interest due until the end of the year. What is the difference in the effective annual rates charged by the two banks? 0.00% 0.59% 0.40% 0.19%

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Answer #1

The formula for effective interest rate is =(1+rate/n)^n-1. The effective interest rate for Calgary bank is not calculated as it will be the same as the nominal interest rate as the compounding frequency is annual or 1.

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