Suppose you are borrowing money for a house. Would you rather have a mortgage ac

Question

Suppose you are borrowing money for a house. Would you rather have a mortgage account that bills simple interest, interest compounded yearly, interest compounded quarterly, interest compounded monthly, or interest compounded daily? Explain your reasoning. Suppose you are borrowing money for a house. Would you rather have a mortgage account that bills simple interest, interest compounded yearly, interest compounded quarterly, interest compounded monthly, or interest compounded daily? Explain your reasoning.

Explanation / Answer

I will have a mortgage account that bills simple interest. When interest is compounded yearly, quarterly, monthly, or daily, effective interest rate always increase as a result. With simple interest, effective intrest rate remains the same. For eg if the rate is 10% per annum, then with simple interest effective interest rate is 10%, but with compounded (say) quarterly) effective interest rate is (1+10%/4)^4 = 10.38%

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