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Dev borrows $6000 from his bank to pay for a truck-driving course. He plans to pay the...

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topgun13 | Honors

Posted January 11, 2012 at 1:50 PM via web

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Dev borrows $6000 from his bank to pay for a truck-driving course. He plans to pay the loan back in 5 years. The bank offered these loans:

A: 7% per year, compounded annually

B: 6.5% per year, compounded every 6 months

Which is a better plan for Dev to take.

Tagged with financial math, math

1 Answer | Add Yours

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justaguide | College Teacher | (Level 2) Distinguished Educator

Posted January 11, 2012 at 2:13 PM (Answer #1)

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Dev borrows $6000 from a bank that has to be repaid in 5 years. The interest rates offered to him are:

7% compounded annually

Here, the amount due after 5 years is equal to `6000*(1.07)^5 = 8415.31`

6.5% compounded half yearly

Here, the amount due after 5 years is equal to `6000*(1.0325)^10 = 8261.36`

It is better for Dev to opt for the loan at an interest rate of 6.5% compounded half yearly.

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