Chapter 5, Problem 27P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# EFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A pays 2% interest compounded annually on deposits, while Bank B pays 1.75% compounded daily. a. Based on the EAR (or EFF%), which bank should you use? b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest.

a.

Summary Introduction

To identify: The bank that offers better rate of interest.

Effective Annual Rate (EAR):

It is also known as the annual equivalent rate. It is the absolute rate of interest, which has earned on an investment. It occurs due to the frequent compounding over a period of time.

Explanation

Formula to calculate EAR is,

EAR=(1+INOMM)Mā1

Where,

• EAR is for effective annual rate.
• INOM is nominal interest rate.
• M is compounding period.

Substitute 1

b.

Summary Introduction

To identify: The better option if fund is to be withdraw in between rather than at the end of the year.

Effective Annual Rate (EAR):

It is also known as the annual equivalent rate. It is the absolute rate of interest, which has earned on an investment. It occurs due to the frequent compounding over a period of time.

### Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

#### The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

#### How does a cost-efficient capital market help reduce the prices of goods and services?

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

#### Compare the four forms of competition.

Foundations of Business (MindTap Course List)

#### Explain the separate entity concept.

College Accounting (Book Only): A Career Approach

#### Operating cash flows rather than accounting income are listed in Table 12.1. Why do we focus on cash flows as o...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)