Question

After examining the various personal loan rates available to​ you, you find that you can borrow funds from a finance company at 13 percent compounded quarterly or from a bank at 14 percent compounded daily. Which alternative is more​ attractive?

If you can borrow funds from a finance company at 13 percent compounded quarterly​, the EAR for the loan is ____%.

Answer 1

EAR=[(1+APR/m)^m]-1
where m=compounding periods

At 13 percent compounded quarterly:

EAR=[(1+0.13/4)^4]-1

=13.65%(Approx)

At 14 percent compounded daily:

EAR=[(1+0.14/365)^365]-1

=15.02%(Approx)

Hence 13% compounded quarterly is better having lower EAR.