Question

Determine the effective annual yield for each investment. Then select the better investment. Assume 360 days in a year. 11% compounded monthly: 11.25% compounded annually %. The effective annual yield for a 11% compounded monthly investment is (Round to two decimal places as needed.)

Answer 1

Answer to first question in the list: When compounded monthly, Effective annual interest rate = (1 + Annual interest rate/12)-1; As there will be 12 compoundings per year. When compounded annually, Effective annual interest rate = (1 + Annual interest rate/1)-1; ; As there will be 1 compounding per year. Therefore, 11% 11.25% compounded compounded monthly annually Annual Percent Rate (APR) 11.00% 11.25% Number of months in a year 12 Effective Annual Rate (EAR) 11.57% 11.25% [Ref: NOTE] 1 11% compounded monthly is the better investment because its EAR is higher than 11.25% compounded annually. NOTE: EAR when 11% compounded monthly = ((1+11.00%/12)^12) - 1 = ((1+0.92%)^12) - 1 = ((1+0.0092)^12) - 1 = (1.009212) - 1 = 11.57%. EAR when 11.25% compounded annually = ((1+11.25%/1)^1) - 1 = ((1+11.25%)^1) - 1 = ((1+0.1125)^1) - 1 = (1.112541) - 1 = 11.25%.