Bank 1 lends funds at a nominal rate of 7% with payments to be made semiannually. Bank 2 requires payments to be made quarterly. If Bank 2 would like to charge the same effective annual rate as Bank 1, what nominal interest rate will they charge their customers? Round your answer to three decimal places. Do not round intermediate calculations.

Bank 1 lends funds at a nominal rate of 7% with payments to be made semiannually. Bank 2 requires payments to be made quarterly. If Bank 2 would like to charge the same effective annual rate as Bank 1, what nominal interest rate will they charge their customers? Round your answer to three decimal places. Do not round intermediate calculations.

 

 

answer:

Effective interest rate= (1 + i/n)n – 1

Bank 1:

i = stated interest rate = 7%

n= number of compounding periods= 2

EAR = (1 + .07/2)2 – 1

= 7.12%

Bank 2:

We want EAR of bank1 and bank2 to be same.

EAR= 7.1225%

7.1225% = (1 + x/4)4 – 1

x= 6.94%

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