Dave is considering two loans. loan u has a nominal interest rate of 9.97%, and loan v has a nominal interest rate of 10.16%. if loan u is compounded daily and loan v is compounded quarterly, which loan will have the lower effective interest rate, and how much lower will it be?

The effective annual rate indicates which savings account will give the

highest returns on savings.

Reasons:

The nominal interest rate for Loan U, i = 9.97%

The compounding frequency of Loan U = Daily

The nominal interest rate for Loan V, i = 10.16%

The compounding frequency for Loan V = quarterly

Required:

The loan that as a lower effective interest rate.

Solution:

The effective (annual) interest rate, EAR,  is given by the formula;

Where;

i = The given nominal interest rate

n = The number compounding periods (compounding frequency)

Therefore;

For Loan U, we have;

For Loan V, we have;

The difference in the interest rate is 10.553692 - 10.482438 ≈ 0.07125

Learn more about the annual effective rate here:

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step-by-step explanation: