Question

You are considering two ways of financing a spring break vacation. You could put it on your credit​ card, at 13 % ​APR, compounded​ monthly, or borrow the money from your​ parents, who want an interest payment of 7 % every six months. Which is the lower​ rate?  ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.)

Answer 1

Borrow from credit card has lower EAR

Step-by-step explanation:

solution

we will apply here EAR formula that is

EAR =
`(1+(r)/(m) )^(m)-1`

here r is rate of interest

and m is compounding frequency

and 13% compounded​ monthly

so

EAR =
`(1+(0.13)/(12) )^(12)-1`

EAR = 0.1380324816

EAR = 13.80324816 %

and

Borrow from parents at 7% payable every six months

so

EAR =
`(1+0.07)^(2)-1`

EAR = 0.1449

EAR = 14.49 %

so

Borrow from credit card has lower EAR