Question

Bank A offers you a loan at 9.61% compounded 5 times a year. Bank B offers to loan you the same amount at 0.10% less than the rate offered by Bank A but compounded twice as often as the Bank A rate is. Which bank's loan should you accept?

Answer 1

Here the rate of interest and compounding both are different for both the banks.

The formula for compounding is:

Investment Value = P x ( 1 + r/n )(Y x n)

P = Principal Value

r = Yearly Interest Rate in decimal form ( example: 5% in decimal form
is .05 )

Y = Life of the investment in years

n = how many times per year the interest is compounded

So loan of $1000 from Bank A will be 1099.87 after a year @ 9.61% compounded 5 times

and Loan of $1000 from Bank B will be 1099.27 after a year @ 9.51% compunded 10 times

Hence Loan from Bank B should be accepted.