Question

Rachel is advising Gunther on selecting a savings account. Which of the following banks provides Gunther with the highest effective rate of interest?

A). Bank 1; 6.1% with annual compounding.

B). Bank 2; 6.0% with monthly compounding.

C). Bank 3; 6.0% with annual compounding.

D). Bank 4; 6.0% with quarterly compounding.

E). Bank 5; 6.0% with daily (365-day) compounding.

Answer 1

Effective interest rate=[(1+APR/m)^m]-1
where m=compounding periods

a.Effective interest rate=[(1+0.061/1)^1]-1

=6.1%

b.Effective interest rate=[(1+0.06/12)^12]-1

=6.17%(Approx).

c.Effective interest rate=[(1+0.06/1)^1]-1

=6%

d.Effective interest rate=[(1+0.06/4)^4]-1

=6.14%(Approx).

e.Effective interest rate=[(1+0.06/365)^365]-1

=6.18%(Approx).

Hence highest Effective interest rate is for :

E). Bank 5; 6.0% with daily (365-day) compounding.