need help with answering question B: A car loan offered by Bank One requires quarterly payments and has an APR of 4.8 percent, whereas a the same loan amount may be obtained from Bank Two at an APR of 5 percent with monthly payments. Which loan would you choose and why?
need help with answering question B: A car loan offered by Bank One requires quarterly payments and has an APR of 4.8 percent, whereas a the same loan amount may be obtained from Bank Two at an APR of 5 percent with monthly payments. Which loan would you choose and why?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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I need help with answering question B: A car loan offered by Bank One requires quarterly payments and has an APR of 4.8 percent, whereas a the same loan amount may be obtained from Bank Two at an APR of 5 percent with monthly payments. Which loan would you choose and why?
Transcribed Image Text:5. Effective Annual Yield (EAY) and Effective Annual Rate (EAR)
A. You plan to invest $1,000 for one year and you have the opportunity to invest it at a
12 percent APR, compounded monthly. Alternatively, you could invest the funds at an
annual rate of 12.3 percent compounded semiannually. What is the EAY of each
alternative? (Hint: You need to carry your answer to at least the fourth decimal place.)
Which investment should be chosen?
B. A car loan offered by Bank One requires quarterly payments and has an APR of 4.8
percent, whereas a the same loan amount may be obtained from Bank Two at an APR
of 5 percent with monthly payments. Which loan would you choose and why?
Transcribed Image Text:Step 1
Hi There, Thanks for posting the questions. As per our Q&A guidelines, must be answered only one
question when multiple questions posted under single question. Hence, the solution for the first
question is provided below. Please repost the remaining questions separately. One of our experts will
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Step 2
A. Calculate the EAY of each alternative as follows:
Effective annual yield=(1+
питber of compоиndings
- 1
rate
питber of compoоundings
=(1+ )" - 1
12%
=(1.01)12 – 1
=1. 126825 – 1
=0. 126825 or 12. 6825%
Therefore, EAY of first alternative is 12.6825%
Effective annual yield=(1+
питber of compоиndings
1
rate
питber of compоиndings
2
12.3%
=(1+
-
=(1.06150)? – 1
=1. 126782 – 1
=0. 126782 or 12. 6782%
Therefore, EAY of second alternative is 12.6782%.
The investor should choose to invest in option 1 (12% compounded monthly) as the EAY is more
compared to option 2.
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