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Effective and nominal interest rates

You are offered two loan options which you must choose between. Federal Bank offers to charge you 6% compounded annually. State Bank offers to charge you 5.8% compounded monthly. Which of the following is true?

You should choose State Bank with an effective annual rate of 5.96%.
You should choose Federal Bank because it has an effective annual rate of 6%.
You should choose State Bank because the interest rate is compounded more often.
You should choose Federal Bank because the nominal rate is lower.
You should choose Federal Bank because the interest is compounded less often.

Solution Summary

Solution chooses the correct option.

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