You Are Considering Two Loans

question 75

Multiple Choice

You are considering two loans.The terms of the two loans are equivalent with the exception of the interest rates.Loan A offers a rate of 7.75 percent,compounded daily.Loan B offers a rate of 8 percent,compounded semi-annually.Which loan should you select and why?

• A)A; the effective annual rate is 8.06 percent.
• B)A; the annual percentage rate is 7.75 percent.
• C)B; the annual percentage rate is 7.68 percent.
• D)B; the effective annual rate is 8.16 percent.
• E)The loans are equivalent offers so you can select either onE.

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Definitions:

Straight-Line Method

A method of calculating depreciation of an asset which assumes the asset will lose an equal amount of value each year over its useful life.

Declining-Balance

A method of accelerated asset depreciation where the depreciation expense decreases over time.

Depreciation Expense

The allocation of the cost of a tangible asset over its useful life, reflecting the asset's wear and tear or obsolescence.

Depreciation Produces

An accounting process that allocates the cost of a tangible asset over its useful life, thus producing a systematic reduction in value to reflect wear and tear or obsolescence.