You would be making a wise decision if you chose to: a. base decisions regarding

Question

You would be making a wise decision if you chose to:

a. base decisions regarding investments on effective rates and base decisions regarding loans on annual percentage rates.

b. assume all loans and investments are based on simple interest.

c. invest in an account paying 6 percent, compounded quarterly, rather than an account paying 6 percent, compounded monthly.

d. accept the loan with the lower effective annual rate rather than the loan with the lower annual percentage rate.

e. ignore the effective rates and concentrate on the annual percentage rates for all transactions.

Explanation / Answer

The wise decision would be to accept the loan with the lower effective annual interest rate rather than the loan with the lower annual percentage rate because effective annual rate takes into account the effect of compounding with respect the time period for which the compounding takes place.

Therefore, the correct answer is D.

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