Problem 6.14 – EAR for First National Bank and First United Bank

Fundamentals of Corporate Finance

Ross, Westerfield, and Jordan

13th Edition

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How can you compare loans with different compounding periods, given their annual interest rates? Suppose there are two banks offering loans with different compounding periods and annual interest rates: Bank A charges X% compounded monthly, while Bank B charges Y% compounded semiannually. Which bank should you choose if you are a potential borrower? Calculate the EAR for the different banks.

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