Question - Building on these definitions, if I ask you in terms of an investment vs. a long term liability such as a car loan. Can you tell me which type of interest would you rather pay on: 1) The investment: Simple or Compound? 2) Car loan: Simple or Compound

Question - Building on these definitions, if I ask you in terms of an investment vs. a long term liability such as a car loan. Can you tell me which type of interest would you rather pay on: 1) The investment: Simple or Compound? 2) Car loan: Simple or Compound

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter7: Using Consumer Loans

Section: Chapter Questions

Problem 6LO

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Question

Question - Building on these definitions, if I ask you in terms of an investment vs. a long term liability such as a car loan. Can you tell me which type of interest would you rather pay on:

1) The investment: Simple or Compound?

2) Car loan: Simple or Compound?

Expert Solution

Step 1

The investment

In this case, the investor shall prefer compound interest because if the investor avails this option than the period after period investor will earn interest on increased amount i.e. initial amount plus the interest earned up to last period. The compound interest provides investors a huge corpus at the completion of the investment period when compared with an investment with SI (simple interest).

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