Question

which one is more profitable? Explain the reason why.

a. 7.5% apr(semi annual compounding)

b. 7% apr(monthly compounding)

Answer 1

A is more profitable EAY of a is 7.641% as compared to EAY of b is 7.225%
A)
7.5% APR semi annual compounding
7.5 / 2 = 3.75% for 6 months
EAY = {(1 + rate)^period -1 } *100
EAY = {( 1 + 0.375 )^ -1 } *100
EAY = 7.641% per annum

b)
7% APR compounded Monthly
7 / 12 = 0.583 % per month
EAY = {(1 + rate)^period -1 } *100
EAY = {( 1+ 0.0583)^12 -1 ) *100
EAY = 7.225% per annum

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