Answered

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Suppose you want to borrow money from banks. You are considering
two loans. The terms of them are equivalent with the exception of the interest
rates. Loan A offers a rate of 7.75 percent, compounded daily. Loan B offers a
rate of 8 percent, compounded semi-annually. Which loan should you select and
why?

Sagot :

The loan I would select is loan A. This is because it has a lower effective annual rate.

Which loan would I select?

The loan I would select would be the cheaper one.  In order to determine the cheaper loan, I would calculate the effective annual rate. The effective annual rate is the actual interest rate that is paid on a loan.

Effective annual rate = (1 + APR / m ) ^m - 1

Where: M = number of compounding

Loan A = ( 1 + 0.0775/365)^365 - 1 = 8.06%

Loan B = (1 + 0.08/2)^2 - 1 = 8.16%

To learn more about the effective annual rate, please check: https://brainly.com/question/4064975

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