Bank A is offering an interest rate of 6.60% compounded monthly, while bank B is offering an interest rate of 6.67% compounded quarterly.
The effective rate offered by bank A =?%,
while the effective rate offered by bank B = ?%.
(1 + i/n)^n - 1
A
(1+.066/12)^12 - 1 = .0680 = 6.80 %
B
(1+.0667/4)^4 - 1 = .0684 = 6.85%
To find the effective rate offered by Bank A, we use the formula:
Effective Rate = (1 + (Nominal Rate / Number of Compounding Periods))^(Number of Compounding Periods) - 1
In this case, Bank A has a nominal interest rate of 6.60% compounded monthly.
Using the formula, we substitute the values:
Effective Rate = (1 + (6.60% / 12))^(12) - 1
Calculating this expression gives us the effective rate offered by Bank A.
Similarly, to find the effective rate offered by Bank B, we use the same formula:
Effective Rate = (1 + (Nominal Rate / Number of Compounding Periods))^(Number of Compounding Periods) - 1
In this case, Bank B has a nominal interest rate of 6.67% compounded quarterly.
Using the formula, we substitute the values:
Effective Rate = (1 + (6.67% / 4))^(4) - 1
Calculating this expression gives us the effective rate offered by Bank B.