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) 12.75% annually, because the annual percentage yield for 12% compounded monthly is
greater than 12.75%.
B) 12.75% annually, because even though the annual percentage yield is higher, interest if paid
only once per year at year end.
C) 12% compounded monthly, because the annual percentage yield is 12.68%.
D) Both rates are effectively the same, so your company should be indifferent between the two.
C
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