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 7.45% compounded daily. Loan B offers a rate of 7.5%
Compounded semi-annually. Loan _____ is the better offer because ______

Question

Quizplus · Accepted Answer

Loan B is the better offer because it has a higher effective annual rate of 7.64% compared to Loan A's effective annual rate of 7.53%. This takes into account the compounding period and gives a more accurate representation of the true cost of borrowing. While Loan B has a slightly higher nominal rate, it compounds less frequently (semi-annually) compared to Loan A's daily compounding, which reduces the overall cost of borrowing. Therefore, Loan B is the better choice.

You Are Considering Two Loans