Question

Craig is considering four loans. Loan L has a nominal rate of 8. 254%, compounded daily. Loan M has a nominal rate of 8. 474%, compounded weekly. Loan N has a nominal rate of 8. 533%, compounded monthly. Loan O has a nominal rate of 8. 604%, compounded yearly. Which of these loans will offer Craig the best effective interest rate? a. Loan L b. Loan M c. Loan N d. Loan O.

Answer 1

Loan L would be best for Craig that has a nominal rate of 8.254% that is compounded daily a sit gives an effective rate of interest as 117.95.

The formula for computing compounded rate of interest is given as follows:

$A=P(1+\frac{r}{n})^{nt}$

The effective rate of interest for loan L as per the above formula would be:

$100(1+\frac{0.08254}{365} )^{2*365}\\=117.95$

The effective rate for loan M would be:

$100(1+\frac{0.08474}{52} )^{2*52} \\=118.45$

The effective rate for loan N would be:

$100(1+\frac{0.08533}{12})^{2*12}\\=118.54$

The effective rate for loan O would be:

$100(1+\frac{0.08604}{1} )^{2*1} \\=117.95$

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