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The effective rate of interest is the real return on a savings account when the effects of an increase over time are taken. Loan U having a lower by 0.000713 points lower than Loan V.
The effective interest rate is also known as the effective annual interest rate, It is the interest rate on a loan and is shown as the equivalent interest rate if compound interest was payable annually in liabilities.
Computation of the effective rate of interest:
The formula of effective rate of interest is:
[tex](1+\frac{r}{t} )t[/tex]
For Loan U:
Nominal rate = 10.16% and compounded daily.
Now by putting the values in the above formula, we get,
[tex]=(1+\frac{r}{t} )^t\\\\=(1+\frac{0.997}{365} )^3^6^5\\\\=(1+0.0027)^3^6^5\\\\=1.104824[/tex]
For loan V:
Nominal rate = 10.16% and compounded quarterly.
Now by putting the values in the above formula, we get,
[tex]=(1+\frac{r}{t} )^t\\\\=(1+\frac{0.1016}{4} )^4\\\\=(1+0.0254)^4\\\\=1.105537[/tex]
Therefore, Loan V has a greater effective interest rate to be 0.000713 (1.105537-1.104824).
To learn more about the effective rate of interest, refer to:
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