Tim needs to borrow $5,000 for two years. The loan will be repaid in one lump su

Question

Tim needs to borrow $5,000 for two years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Tim?

8.0 percent interest, compounded monthly

8.0 percent interest, compounded quarterly

8.0 percent interest, compounded daily

7.5 percent interest, compounded quarterly

7.5 percent interest, compounded monthly

8.0 percent interest, compounded monthly

8.0 percent interest, compounded quarterly

8.0 percent interest, compounded daily

7.5 percent interest, compounded quarterly

7.5 percent interest, compounded monthly

Explanation / Answer

correct option is "D" - 7.5% compounded quarterly.

As this option will result in least payment of loan amount which is = FVF@1.875%,8 * Amount

                   = 8.55 * 5000

                    = $ 42750

[quarterly rate = 7.5/4 = 1.875% ,number of quarters in a 2 years = 2 *4 = 8

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