Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0%,simple interest,with interest paid quarterly.Merchants Bank offers to lend you the $50,000,but it will charge 6.0%,simple interest,with interest paid at the end of the year.What's the difference in the effective annual rates charged by the two banks?

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) for Farmers Bank is calculated by considering the quarterly interest payments, which results in an EAR of 5.0945%. For Merchants Bank, the EAR is simply the nominal rate of 6.0% since interest is paid annually. The difference between the two EARs is 6.0% - 5.0945% = 0.9055%, which rounds to 0.91%.

Farmers Bank Offers to Lend You $50,000 at a Nominal