Suppose you are borrowing money at a 10% annual nominal interest rate. To pay as little as possible, which one of the following compounding periods should you prefer?
A)weekly
B)monthly
C)daily
D)annually

Question

Quizplus · Accepted Answer

The best choice is annual compounding because the interest rate is nominal, meaning it is only applied once per year. Choosing a compounding period shorter than a year would result in more frequent application of the interest rate, leading to a higher effective interest rate and ultimately, higher borrowing costs.

Suppose You Are Borrowing Money at a 10% Annual Nominal