You are considering two loans. The terms of the two loans are equivalent with th

Question

You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 7.75 percent, compounded daily. Loan B offers a rate of 8 percent, compounded semi-annually. Which loan should you select and why?

Answer

B; the annual percentage rate is 7.68 percent.


A; the annual percentage rate is 7.15 percent.


B; the effective annual rate is 8.16 percent.


A; the effective annual rate is 8.06 percent.


The loans are equivalent offers so you can select either one.

Explanation / Answer

ans) A; the effective annual rate is 8.06 percent. Effective annual rate of A: (1 + .0775/365)^365 - 1 = .08057 Effective annual rate of B: (1 + .08/2)^2 - 1 = .0816 The better offer is loan A since the effective rate is lower.

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