Question

Yolanda has an urgent expense she needs to pay for now, but has no cash savings at the moment. Her uncle has offered to lend her the $1300 she needs now if she agrees to repay him $1490 in 2 years. Alternatively, Yolanda has a good credit rating and could borrow the money from her bank at a rate of 6.5% per annum, compounded quarterly. What should Yolanda do and Why? Select one: a. Borrow from the bank as this is a better option: the effective annual rate the bank is offering her is 6.5%. b. Borrow from her uncle as this is a better option: the effective annual rate the uncle is offering her is 7.06%. c. Borrow from the bank as this is a better option: the effective annual rate the bank is offering her is 6.66%. d. Borrow from her uncle as this is a better option: the effective annual rate the uncle is offering her is 6.88%

Answer 1

In case of A

If Yolanda Borrow from the bank with an effective annual rate the bank is offering her is 6.5%. – She will be required to pay $1,389.84 to the bank

In case of B

If Yolanda Borrow from her uncle with an the effective annual rate the uncle is offering her is 7.06% -- She will be required to pay 1,397.75 to her uncle

In case of C

If Yolanda Borrow from the bank with an effective annual rate the bank is offering her is 6.66%. – She will be required to pay $1,392.10 to the bank

In case of D

If Yolanda Borrow from her uncle with an the effective annual rate the uncle is offering her is 6.88% -- She will be required to pay 1,395.21 to her uncle

Answer --

Thus, among the given option, Yolanda should borrow from bank with an effective annual rate of 6.5%. Therefore, she will be required to pay only $1389.84 which is relatively lower than the other options