Question

In order to invest, Junior needs to take a loan. Two banks offer the following loan...

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.

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Homework Answers

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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