Assume you want to borrow 5000 for 5 years and repay the ent

Assume you want to borrow $5,000 for 5 years and repay the entire amount with interest at the end of the loan term. Which one of the following interest rates would you prefer?

A. 5% simple interest

B. 5% interest compounded annually

C. 7% simple interest

D. 7% interest compounded annually

Could you explain why to choose and why others don\'t choose? Thank you

Solution

The total amount payable under each of the alternative interest rates are: A) 5000*(1+5*5%) = $ 6,250.00 B) 5000*1.05^5 = $ 6,381.41 C) 5000*(1+7%*5) = $ 6,750.00 D) 5000*1.07^5 = $ 7,012.76 The alternative (A) is to be chosen. The reason is that it gives the lowest amount to be repaid at the the end of the fifth year.