Question

Mr. Nielson wants to borrow $1,000 for 2 years. He is given the choice of
i) simple interest at 12%, or
ii) a loan at 10% compounded monthly.
Which loan results in less interest due ?

b) What interest rate compounded quarterly will give an effective interest rate of 7% ?

Answer 1

1. I = Prt = 1000 * 0.12 * 2 = $240.

2. Pt = Po*r*t / (1 - (1+r)^-t,

r=(10% / 12) / 100% = 0.00833 = Monthly
% rate expressed as a decimal.

t = 2yrs * 12mo/yr = 24 Months.

Pt=1000*0.00833*24/(1 - (1.00833))^-24
= 199.992 / 0.180583955 = $1107.47.

I = 1107.47 - 1000 = $107.47

Option 2gives lowest Interest.