EAR=(1+APR/m)^m-1
where m=compounding periods
a.EAR=(1+0.0772/4)^4-1
=7.95%(Approx).
b.EAR=(1+0.0752/12)^12-1
=7.78%(Approx).
c.EAR=(1+0.0802/1)^1-1
=8.02%
Hence the three year bank CD paying 8.02% compounded annually has the highest effective yield.
Problem 6.32 a-d You are considering three altemative investments: A three-year bank CD paying 7.72 percent...
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Your grandmother asks for your help in choosing a certificate of deposit (CD) from a bank with a one-year maturity and a fixed interest rate. The first certificate of deposit, CD #1, pays 5.95 percent APR compounded quarterly, while the second certificate of deposit, CD #2, pays 6.00 percent APR compounded annually. What is the effective annual rate (the EAR) of each CD, and which CD do you recommend to your grandmother? If the first certificate of deposit, CD #1,...
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