Math

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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% ?

  • Math -

    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.

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