Carlos is the new assistant branch manager of a larger Florida-based bank and the branch manager has asked him a question to test his knowledge. The question is which rate should the bank advertise on monthly-compounded loans, the nominal annual percentage rate or the effective annual percentage rate? Which rate should the bank advertise on quarterly-compounded savings accounts? Explain. As a consumer, which would you prefer to see and why?
What will be an ideal response?
A bank would rather advertise the annual percentage rate on loans since this rate appears to be lower and the effective annual rate. With respect to savings accounts, the bank would advertise the effective rate since this rate will be higher than the annual percentage rate(APR). As a consumer, the effective rate is the more important rate since it represents the rate actually paid or earned.
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