Mphela Electronics needs to arrange financing for its expansion program.Bank A offers to lend Mphela the required funds on a loan where interest must be paid monthly, and the quoted rate is 8 percent.Bank B will charge 9 percent, with interest due at the end of the year.What is the difference in the effective annual rates charged by the two banks?

Question

Quizplus · Accepted Answer

Bank A's effective annual rate (EAR) is calculated using the formula for monthly compounding: EAR = (1 + 0.08/12)^12 - 1 = 8.30%. Bank B's EAR is simply the quoted rate of 9% since interest is due annually. The difference is 9% - 8.30% = 0.70%.

Mphela Electronics Needs to Arrange Financing for Its Expansion Program