Question

Joy is taking out a car loan which she will pay back with interest. Which option will require her to pay the lowest amount in interest?

A) Semi-annual compoundingB) Daily compoundingC) Annual compoundingD) Monthly compounding

Answer 1

C) Annual compounding

Step-by-step explanation:

The formula for compound interest is given as

Interest = Principle × ( 1 + Interest rate )ⁿ - 1

Here,

n is the number of compounding period

and, the interest varies with the number of periods

Now,

For Annual compounding

Number of compounding period in a year will be 1

For Semi-annual compounding

Number of compounding period in a year will be 2

For Monthly compounding

Number of compounding period in a year will be 12

For Daily compounding

Number of compounding period in a year will be 365

Therefore,

For annual compounding the interest will be least.