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

To compare the interest rates of the two loans, we need to calculate their annual percentage rates (APR). Using the formula APR = (1 + r/n)^n - 1, where r is the stated annual interest rate and n is the number of times compounded in a year, we get:

For Loan A:
APR = (1 + 0.0745/365)^365 - 1 = 0.0763 or 7.63%

For Loan B:
APR = (1 + 0.075/2)^2 - 1 = 0.0764 or 7.64%

Since Loan B has a higher APR, it is the better offer. This means that even though it has a slightly higher interest rate, the fact that it is compounded semi-annually (i.e. less frequently than daily) makes it a better deal overall.

You Are Considering Two Loans