Question

Some lending institutions compound interest daily or even continuously. (The term continuous compounding is used when interest is being added as often as possible—that is, at each instance in time.) The point of this exercise is to show that, for most consumer loans, the answer you get with monthly compounding is very close to the right answer, even if the lending institution compounds more often. For example, if you borrow $6780 from an institution that compounds monthly at a monthly interest rate of 0.67% (for an APR of 8.04%), then in order to pay off the note in 48 months, you have to make a monthly payment of $165.65. Would you expect your monthly payment to be higher or lower if interest were compounded daily rather than monthly?

Answer 1

Answer:

It will be higher on compounded daily than compounded monthly

Explanation:

At a higher compounding, the more interest are generated therefore, the cuota to pay the loan will be higher if the same rate compounds daily than monthly. That's because it capitalize more times during the period, generating more interest.

This find a limit in the continous rate, which generates interest instantly.