You Go to Three Different Banks to Borrow $10,000 for One

question 162

Multiple Choice

You go to three different banks to borrow $10,000 for one year.Each says it will lend you the money at 10 percent,but their terms differ as follows: Bank A: Simple interest
Bank B: Add-on interest
Bank C: Discounted interest
Banks A and C require a single payment at the end of the year.Bank B requires 12 equal monthly payments beginning at the end of the first month.What is the difference between the highest and lowest effective annual rate in this case?

• A) 13.0%
• B) 9.5%
• C) 9.0%
• D) 8.5%
• E) 8.0%

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Definitions:

Duration

A measure of the sensitivity of the price of a bond or other debt instrument to changes in interest rates, often indicating the bond's price volatility.

Red Herring

In financial contexts, a red herring is a preliminary prospectus filed by a company with the SEC, usually in connection with an initial public offering, containing important information but lacking details on price and offering size.

Prospectus

A formal document that companies and mutual funds use to describe the investment offering to potential investors, providing details such as objectives, risks, and financials.

SEC

The U.S. Securities and Exchange Commission, a federal agency tasked with protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation.