In: Finance
You are considering the following loans. Assuming all else being equal, from which bank should you borrow? (Hint: Pick the one with the lowest effective annual interest rate.) Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.
a Bank A: annual interest rate of 12.8% compounded ANNUALLY. b Bank B: annual interest rate of 12.6% compounded ANNUALLY. c Bank C: annual interest rate of 12.4% compounded SEMI-ANNUALLY. d Bank D: annual interest rate of 12.2% compounded QUARTERLY. e Bank E: annual interest rate of 12.0% compounded MONTHLY.
BANK A : ANNUAL COMPOUNDING, m = 1
EAR = (1+ APR/m)^m - 1 = (1+ 0.128/1)^1 - 1 = 0.128 = 12.8%
BANK B : ANNUAL COMPOUNDING, m = 1
EAR = (1+ APR/m)^m - 1 = (1+ 0.126/1)^1 - 1 = 0.126 = 12.6%
BANK C : SEMI ANNUAL COMPOUNDING, m = 2
EAR = (1+ APR/m)^m - 1 = (1+ 0.124/2)^2 - 1 = 0.12784 = 12.78%
BANK D : QUARTERLY COMPOUNDING, m = 4
EAR = (1+ APR/m)^m - 1 = (1+ 0.122/4)^4 - 1 = 0.12769 = 12.77%
BANK E : MONTHLY COMPOUNDING, m = 12
EAR = (1+ APR/m)^m - 1 = (1+ 0.12/12)^12 - 1 = 0.12683 = 12.68%
As we are borrowing, we will go wirh least EAR, that is, BANK B = 12.6%
ANSWER : BANK B : 12.6% RATE COMPOUNDED ANNUALLY