FNB pays 6% interest compounded semi annually. SNB pays 6% compounded monthly. which bank offers the higher effective annual rate? explain?
Answers
Answer:
FNB pays 6% interest compounded semi annually. SNB pays 6% compounded monthly. which bank offers the higher effective annual rate? explain? See Explanation
Explanation:
Meaning of interest compounded semi annually or monthly compounded
1. When interest is paid compoundable semi annually means First interest if calculated in the first half year and the interest is added in the principal. Thereafter, interest is paid on the amount ( Principal and interest for 1st half)
or there can be a direct calculations also.
2. When interest is paid compoundable monthly means First interest if calculated ion monthly and the interest is added in the principal on monthly basis. Thereafter, interest is paid on the amount ( Principal and interest for each month) or there is also another way of direct calculations on monthly basis.
In case of SNB they are paying interest compoundable on monthly basis which is better offer.
This can be made clear with the following calculations
Say amount invested 10,00,000.00
Interest calculations for yearly interval will be
10,00,000*6/100=60,000.00
Interest calculations for semi annually basis will be
10,00,000*6%*6/12=30,000.00
10,30,000*6%*6/12=30,900.00
Total interest will be =60,900.00
Further in case of SNB the interest calculations will be on monthly compoundable and as such will be better option
Answer:151689
Explanation: