Question

If you have the option of choosing a loan that will accumulate 4%/ a interest compounded semi-annually compared to a loan that will accumulate 4% /a interest compounded monthly, which one would you choose

Answer 1

4%/ a interest compounded semi-annually

Explanation:

The option that gives the lower interest rate payment would be more appropriate. to determine this calculate the effective interest rate

Effective annual rate = (1 + APR / m ) ^m - 1

M = number of compounding

(1 + 0.04/2)^2 - 1 = 4.04%

(1 + 0.04/12)^12 - 1 = 4.07%

the choice should be 4%/ a interest compounded semi-annually