Question

Dave is considering two loans. Loan U has a nominal interest rate of 9.97%, and Loan V has a nominal interest rate of 10.16%. If Loan U is compounded daily and Loan V is compounded quarterly, which loan will have the lower effective interest rate, and how much lower will it be? a. Loan V’s effective rate will be 0.3324 percentage points lower than Loan U’s. b. Loan V’s effective rate will be 0.1187 percentage points lower than Loan U’s. c. Loan U’s effective rate will be 0.5124 percentage points lower than Loan V’s. d. Loan U’s effective rate will be 0.0713 percentage points lower than Loan V’s.

Answer 1

d

Explanation:

d

Answer 2

d. Loan U’s effective rate will be 0.0713 percentage points lower than Loan V’s

Explanation:

The effective annual multiplier for loan U is ...

(1 +.0997/365)^365 ≈ 1.104824

The effective annual multiplier for loan V is ...

(1 +.1016/4)^4 ≈ 1.105537

Loan V has a higher effective rate by ...

1.105537 -1.104824 = 0.000713 = 0.0713%