Multiple choice

Bank A is now lending money at 13.2 % interest compounded annually. The rate at Bank B is 12.6% compounded monthly and the rate at Bank C is 12.7% compounded quarterly. If you need to borrow money, at which bank will you pay the least interest?

  1. A

  2. B

  3. C

  4. None of these
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Effective annual rates: A = 13.2%. B = (1 + 0.126/12)^12 - 1 = 13.35%. C = (1 + 0.127/4)^4 - 1 = 13.31%. Bank A has the lowest effective rate.

AI explanation

To find the effective annual rate, we evaluate the compounding effect for each bank. For Bank A, the rate is 13.2 percent. For Bank B, the effective rate is 1 plus 0.126 divided by 12 raised to the 12th power minus 1, which is about 13.35 percent. For Bank C, the effective rate is 1 plus 0.127 divided by 4 raised to the 4th power minus 1, which is about 13.34 percent. Since Bank A has the lowest effective annual interest rate, it charges the least interest, making it the correct choice.

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