Question

In order to invest, Junior needs to take a loan. Two banks offer the following loan rates. One lends at 8.5%interest, with daily compounding. The other lends at 8.35% with quarterly compounding. Calculate EAR and decide which bank he should choose.

Answer #1

Solution:-

Assume 365 days in a year.

**To Calculate
EAR-**

**Option - 1**

EAR =

EAR =

EAR = 1.088706 - 1

**EAR = 8.8706%**

**Option - 2**

EAR =

EAR =

EAR = 1.086151 - 1

**EAR = 8.6151%**

**He should choose that bank which would charge less
Interest from him.**

**So Option - 2 is prefer.**

If you have any query related to question then feel free to ask me in a comment.Thanks.

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