Question

A lender offers a choice between two loans. For loan A the lender charges 12% a year compounded 12 times a year. For loan B the lender charges 12.5% a year and compounds it once a year. Is loan A or loan B a cheaper loan for the borrower. Please show work!!!

Answer 1

Loan A:
P = Po(1+r)^n.

Po = $100.

r = 0.12/12mo. = 0.01/mo.

P = 100(1.01)^12 = $$112.68

Loan B:
P = 100(1.125)^1 = $112.50

Answer 2

The amount of loan can be any value as long as the loans are equal.