Answer to Question #207595 in Finance for Timothy Ndengu

Question #207595

upon retirement came across the following investment regimes;


a) 12% p.a compounded annually


b) 11% p.a compounded quarterly


c) 10% p.a. compounded monthly


d) 9.85% p.a compounded continuously


 


advise


i) As a rational lender which one would you choose?                        (3 marks)


ii) As a rational borrower which of the regimes would you choose?             (3 marks)


1
Expert's answer
2021-06-17T12:56:43-0400

With compound interest, the rate at which interest accrues depends on the frequency of compounding, such that compounding interest semiannually would accrue more interest than compounding annually.


As a rational lender which one would you choose?

As a rational lender, aiming to earn a higher interest on the money lent to a borrower, I would choose 9.85% p.a compounded continuously. In this regime the money lent continuously earns interest, refeeds the interest into the balance then the interest itself earns more interest.


As a rational borrower which of the regimes would you choose?

As a rational borrower seeking to minimize the interest I will have to pay to the lender, I would choose 12% p.a compounded annually. Here the frequency of compounding will be less than any other regime listed above and hence low interest will accrue.


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Comments

Timothy
18.06.21, 09:17

Way better than my lecturer explained it. Kudos!

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