Effective
Interest Rate Example
Mr. Ali wants to take a loan
for a business. He approached two banks and the bank offer the following rates
to Mr. Ali.
|
ABC
Bank
|
XYZ
Bank
|
|
Interest
rate = 2% monthly
|
25% compounded annually
|
|
|
|
|
|
|
Advice which bank offer
must be accepted?
1. Calculate effective rate for bank ABC
R = (1+i) n-1
= (1.02)12-1
=1.268-1
=.268
=
26.82%
Effective interest rate of bank ABC is
higher than XYZ , therefore Bank XYZ loan offer must be accepted.
