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 6.8%,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

Students must understand that "simple interest with interest paid quarterly" means that the bank gets the interest at the end of each quarter,hence it can invest it,presumably at the same nominal rate.This results in the same effective rate as if it were stated as "5.0%,quarterly compounding." 11ea856c_8bea_bc2d_9aec_dde87407e2b2_TB1222_00

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