Question

Melanie is looking for a loan. She is willing to pay no more than an effective rate of 9.955% annually. Which, if any, of the following loans meet Melanie’s criteria?

Loan A: 9.265% nominal rate, compounded weekly
Loan B: 9.442% nominal rate, compounded monthly
Loan C: 9.719% nominal rate, compounded quarterly
a.
B only
b.
A and C
c.
A and B
d.
None of these fit Melanie’s criteria.


Please select the best answer from the choices provided

A
B
C
D

Answer 1

C

Calculations:
- A: EAR = (1 + 0.09265/52)^52 − 1 ≈ 0.09685 ≈ 9.685% (≤ 9.955%)
- B: EAR = (1 + 0.09442/12)^12 − 1 ≈ 0.09847 ≈ 9.847% (≤ 9.955%)
- C: EAR = (1 + 0.09719/4)^4 − 1 ≈ 0.10079 ≈ 10.079% (> 9.955%)

So loans A and B meet Melanie’s criterion.