Question

You have found three investment choices for a one-year deposit 10.4% APR compounded monthly, 10.4% APR compounded annually, and 9.7% 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) Enter your answer in each of the answer boxes. Save for Later O BA e

Answer 1

Effective annual rate = ( 1 + r / m )m - 1

r = Annual percentage rate

m = duration

a) EAR of the first investment choice =

10.4 % APR compounded monthly

= ( 1 + r / m )m - 1

= ( 1 + 0.104 / 12)12 - 1

= (1.0086666666666)12 - 1

= 1.109103 - 1

i = 0.109103

I = i * 100

= 0.109103 * 100

= 10.910 %

b) EAR of the Second investment choice =

10.4 % APR compounded yearly

= ( 1 + r / m )m - 1

= ( 1 + 0.104 / 1)1 - 1

= (1.104)1 - 1

= 0.104

I = i * 100

= 0.104 * 100

= 10.4 %

c) EAR of the third investment choice =

9.7 % APR compounded daily

= ( 1 + r / m )m - 1

= ( 1 + 0.097 / 365)365 - 1

= (1.0002657534246)365 - 1

= 1.101846 - 1

i = 0.101846

I = i * 100

I = 0.101846 * 100

= 10.184 %