You are considering the following loans. Assuming all else beingequal, from which bank should you...

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.

Solutions

Expert Solution

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

jeff jeffy answered 2 years ago

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