Question

You have found three investment choices for a​ one-year deposit: 9.6%

APR compounded​ monthly, 9.6%

APR compounded​ annually, and 8.7%

APR compounded daily. Compute the EAR for each investment choice.​ (Assume that there are 365 days in the​ year.) ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.)

The EAR for the first investment choice is
____%.

​(Round to three decimal​ places.)The EAR for the second investment choice is

_____%.

​ (Round to three decimal​ places.)The EAR for the third investment choice is

_____%.

​(Round to three decimal​ places.)

Answer 1

First choice

Monthly compounding       
no. of compounding in a year (m) =   12  
rate (r)=   9.60%  
Effective annual interest formula (i)= (1+(r/m))^m-1      
((1+(   9.60%   /12))^12) - 1
1.100338694   -1  
0.1003386937   or   10.034%

So EAR of first Investment choice is 10.034%

Second choice

Annual compounding       
no. of compounding in a year (m) =   1  
rate (r)=   9.60%  
Effective annual interest formula (i)= (1+(r/m))^m-1      
((1+(   9.60%   /1))^1) - 1
1.096   -1  
0.096   or   9.600%
So EAR of second Investment choice is   9.60%  

Third choice

Daily compounding       
no. of compounding in a year (m) =   365  
rate (r)=   8.70%  
Effective annual interest formula (i)= (1+(r/m))^m-1      
((1+(   8.70%   /365))^365) - 1
1.090885371   -1  
0.09088537062   or   9.089%

So EAR of third Investment choice is   9.089%  

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