Loans:Which of these represents the lowest effective interest rate?

Which of these represents the lowest effective interest rate?

A: 0.2% per week, compounded weekly
B: 1% per month, compounded daily
C: 8% per year, compounded monthly
D: 8% per year, compounded daily

Question options:

  • A
  • B
  • C
  • D

Work:

A: (1+.002/1)^52 - 1 = .109485
B: (1+.01/30)^365 - 1= .129355
C: (1+.08/12)^12 - 1 = .083
D: (1+ .08/365)^365 - 1 = .083278

Answer: 8% per year, compounded monthly represents the lowest EIR.

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