Partners Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly.An offer to lend you the $50,000 also comes from Community Bank, 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 Partners Bank is calculated using the formula for simple interest with quarterly compounding: EAR = (1 + (0.05/4))^4 - 1 = 5.0945%. For Community Bank, the EAR is simply 6% since interest is paid annually. The difference in EARs is 6% - 5.0945% = 0.9055%, approximately 0.91%.

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