Question

(Related to Checkpoint​ 5.7) ​ (Calculating an​ EAR)  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

2.45

percent APR compounded

quarterly​,

while the second certificate of​ deposit, CD​ #2, pays

2.50

percent APR compounded

weekly.

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, pays

2.45

percent APR compounded

quarterly​,

the EAR for the deposit is

nothing​%.

​(Round to two decimal​ places.)

Answer 1

If APR = 2.45%, compounded quarterly

EAR = (1+(rate / m)^m )- 1

EAR = ((1+(2.45%/4))^4 -1)

EAR = 2.47%

If APR = 2.50%, compounded weekly

EAR = (1+(rate / m)^m )- 1

EAR = ((1+(2.50%/52))^52 -1)

EAR = 2.53%

I would recommend CD#2 to grandmother as it has higher EAR