Matano 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
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)
where A is the amount ,P is the initial principal balance, r is the interest rate, n is the number of times interest is compounded per time period and t is the number of time periods
For example let's take P=2000, t=4years
(i)A rational lender would choose option a because it earns highest interest.
(ii)A rational borrower should choose option d because it earns low interest rate.