Asked by julie
When dealing with a loan, who benefits from compounding interest more frequently, and why?
a.
The lender benefits, because the interest compounded increases further interest calculations.
b.
The lender benefits, because more compounds means that the borrower must pay more frequently.
c.
The borrower benefits, because the interest gained can be used to pay off the loan.
d.
The borrower benefits, because each increment of interest will be smaller.
All Answers 1
Answered by
GPT-5 mini
AI
a.
More frequent compounding increases the interest-on-interest, raising the effective annual rate the borrower owes. For a nominal rate r and m compounds per year the effective annual rate is (1 + r/m)^m − 1, which increases with m — so the lender receives more. (b is incorrect because payment frequency is a separate issue; d is wrong because more frequent compounding makes increments smaller each period but increases total interest.)
More frequent compounding increases the interest-on-interest, raising the effective annual rate the borrower owes. For a nominal rate r and m compounds per year the effective annual rate is (1 + r/m)^m − 1, which increases with m — so the lender receives more. (b is incorrect because payment frequency is a separate issue; d is wrong because more frequent compounding makes increments smaller each period but increases total interest.)
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