Comparing interest rates

Liz Khar · #1 Jan 28, 2006, 07:59 PM

CaptianForest, how did you come up with 8.6 semiannually is better.

Per the question:
Semiannually 8.6; pv = 100; pmt = 0; FV = 100 with my calculation

Annual 8.4; pv = 100; pmt = 0 ; FV = 100

CaptainForest · Jan 28, 2006, 09:56 PM

Quote:

Originally Posted by Liz Khar

Suppose you can borrow money at 8.6% per year (APR) compounded semiannually or 8.4% per year (APR) compounded monthly. Which is the better deal?

That was the question you posed on the other thread.

I am sorry, I misread the question. I thought they were both at 8.6&, I didn’t realize monthly was at 8.4%. The correct answer is below (Hint: Monthly wins)

So basically, is 8.6% semiannually better or worse than 8.4% monthly?

At semi annually = EAR = (1+.086/2)^2-1 = .087849 = 8.78%
At monthly = EAR = (1+.084/12)^12-1 = .08731 = 8.73%

Therefore, the Effective Annual Rate (EAR) is LOWER for monthly than it is for semi annually.

And since the question is what is best for you, the consumer who is taking out a mortgage, you would want the lowest possible interest rate possible. Therefore, compounded monthly at 8.4% is the better choice.



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