Your company is able to arrange financing at either a rate of 12.75% annually,or at a rate of 12% compounded monthly.Assuming financing is needed for one year,which rate is the best?
A)12% compounded monthly,because the annual percentage yield is 12.68%
B)Both rates are effectively the same,so your company should be indifferent between the two.
C)112.75% annually because the annual percentage yield for 12% compounded monthly is greater than 12.75%.
D)12.75% annually,because even though the annual percentage yield is higher,interest if paid only once per year at year end.

Question

Quizplus · Accepted Answer

The best choice is 12% compounded monthly because it has a higher annual percentage yield (APY) than the 12.75% annual rate. The APY for 12% compounded monthly is calculated as (1+0.01/12)^12 - 1 = 0.1268, which is higher than the 12.75% annual rate. This means that with the 12% compounded monthly rate, more interest is earned on the principal investment.

Your Company Is Able to Arrange Financing at Either a Rate