Question

You're evaluating a student loan to complete your MBA right after graduation. It would require a loan of $180,000. The bank has provided you with two options:

1. 10-year loan with an APR of 5%, compounded monthly
2. 10-year loan with an APR of 5%, compounded semi-annually

Which option gives you the lower annual payment? Round to the nearest dollar.

	a.	Option #1, the payment is $23,443
	b.	Option #2, the payment is $23,382
	c.	Option #1, the payment is $23,311
	d.	Option #2, the payment is $23,430

Answer 1

	Annual payment under option -1
		Effective annual rate =		(1+5%/12)^12-1
					5.12%
		Now we have to compute the annual payment using financial calculator
		put in calculator
		PV		-180000
		N		10
		FV		0
		I		5.12%
		Compute PMT	$23,443
	Annual payment under option -2
		Effective annual rate =		(1+5%/2)^2-1
					5.06%
		Now we have to compute the annual payment using financial calculator
		put in calculator
		PV		-180000
		N		10
		FV		0
		I		5.06%
		Compute PMT	$23,382
	Therefore option 2 will give lower annual payment
	ans =	b Option #2, the payment is $23,382