Which of these loan rates is most favorable?
A) 12% compounded annually
B) 11.5% compounded monthly
C) 11.5% compounded quarterly
D) 11% continuously compounded

Question

Quizplus · Accepted Answer

The continuously compounded rate (option D) is the most favorable as it results in the highest effective annual rate. The formula for calculating the effective annual rate is (1 + r/n)^n - 1, where r is the annual interest rate and n is the number of compounding periods in a year. As the compounding period approaches infinity (i.e. continuous compounding), the effective annual rate approaches e^r - 1, which is the highest possible effective annual rate for a given nominal rate. Using this formula, we can see that option D results in the highest effective annual rate compared to the other options.

Which of These Loan Rates Is Most Favorable