Larry is considering two bank loans. Bank A is offering a loan at 5.21% interest

Question

Larry is considering two bank loans. Bank A is offering a loan at 5.21% interest paid at the end of one year, annual compounding. Bank B is offering a 5.15% interest loan, compounded quarterly, paid at the end of one year. Which bank loan should Larry select?

A) Bank A as the nominal rate of 5.21%is better than the nominal rate 0f 5.15 %for Bank B.

B)Bank B as the effective rate of 5.15% is better than the effective rate of 5.21% for Bank A

C) Bank B as the effective rate of 5.25% is better than the effective rate of 5.21% for Bank A

D) Bank A as the effective rate of 5.21% is better than the effective rate of 5.25% for Bank B

Explanation / Answer

Option D

Effective rate of interest for Bank A=nominal rate as annual compounding=5.21%
Effectiev rate of interest for Bank B=(1+5.15%/4)^4-1=5.25%

Hence, Bank A should be selected as effective rate of 5.21% is better than the effectev rate of 5.25% for Bank B

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