This Question: 1 pt 25 of 40 (0 complete) This Test: 40 pts possible fror ork q

Question

This Question: 1 pt 25 of 40 (0 complete) This Test: 40 pts possible fror ork q Last National Bankis offering you a loan at 10%, payments on the loan are to be made monthly. Credit on loan where payments are to be made semiannually, the rate on the loan is also 10%. Local Bank down the street is also offering a loan at 10% where the payments are made quarterly Which loan has the lowest annual cost? que O A. Local Bank's loan O B. Credit Onion's loan ° C. Last National Bank's loan 0 D. All of the loans will have the same annual cost 19 extboo ons dation of atio... Fo solutions Click to select your answer nce Cheg can help right xpert Answer

Explanation / Answer

The loan which has higher frequency of payment, keeping simple interest rate constant, will have higher interest cost. so credit onion where payment is made semiannualy will have lowest annual interest cost.

Mathematically, Effective interest rate = ((1+nominal rate/frequency of payment in a year)^frequency of payment in a year)-1

For last nationa bank, effective rate=((1+0.1/12)^12)-1=10.47%

For credit onion, effective rate=((1+0.1/2)^2)-1=10.25%

For local bank, effective rate=((1+0.1/4)^4)-1=10.38%

Therefore Credit Onion has lowest effective interest rate 10.25%

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