Question

You wish to borrow $2,000 for 2 years to start a business. You approach different lenders who have the following offers. Which is the best lender to borrow from? All percentage rates are rounded to 6 decimal places.

Select one:

a. 13.067733% pa APR compounding monthly where there are exactly 12 months per year.

b. 13.319794% pa APR compounding quarterly where there are exactly 4 quarters per year.

c. 1.097885% as an effective monthly rate where there are exactly 12 months per year.

d. 0.252295% as an effective weekly rate where there are exactly 52 weeks per year.

e. I'll lend you the $2,000 now if you pay me a single payment of $2,599.2 in 2 years, with no other payments in between.

Answer 1

To anwer this question we need compare all the five options. This can be done bringing them all down to annual rates in APY terms. APY takes into account the effect of compounding and hence is the appropriate method for comparison:

As shown in above calculation APY is minimum in option A. Hence, Option A is the answer,