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Question
Your company is able to arrange financing at either a rate of 12.75% annually, or at a rate of 12% compounded monthly. Assuming financing is needed for one year, which rate is the best?A) 12% compounded monthly, because the annual percentage yield is 12.68%.
B) 12.75% annually, because the annual percentage yield for 12% compounded monthly is greater than 12.75%.
C) 12.75% annually, because even though the annual percentage yield is higher, interest if paid only once per year at year end.
D) Both rates are effectively the same, so your company should be indifferent between the two.
Answer
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