QUESTION 3 You are considering two loans. The terms of the two loans are equival

Question

QUESTION 3

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 8.10 percent compounded daily. Loan B offers a rate of 8.25 percent compounded semi-annually. Loan _____ is the better offer because______.

A; the effective annual rate is 8.41 percent

A; the annual percentage rate is 8.41 percent

B; the annual percentage rate is 8.32 percent

B; the interest is compounded less frequently

B; the effective annual rate is 8.42 percent

A; the effective annual rate is 8.41 percent

A; the annual percentage rate is 8.41 percent

B; the annual percentage rate is 8.32 percent

B; the interest is compounded less frequently

B; the effective annual rate is 8.42 percent

Explanation / Answer

EAR=(1+APR/m)^m-1

where m=compounding periods

For A:EAR=(1+0.081/365)^365-1=8.44%

For B:EAR=(1+0.0825/2)^2-1=8.42%

Hence the correct option is E.

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