Which of the following loan terms results in the highest effective cost of the loan to the borrower?
A) 5.8 percent, compounded semi-annually
B) 5.84 percent, compounded continuously
C) 5.85 percent, compounded monthly
D) 5.9 percent, compounded quarterly

Question

Quizplus · Accepted Answer

The effective cost of a loan increases with the frequency of compounding for the same nominal interest rate. Compounding continuously (B) results in the highest effective interest rate compared to semi-annually, monthly, or quarterly compounding, even if the nominal rate is slightly lower than the highest nominal rate option (D).

Which of the Following Loan Terms Results in the Highest