Question

Rank the following certificates of deposit from highest to lowest effective rates: A. 6 years at 11% compounding quarterly B. 2 years at 11.03% compounding every other month C. 1 year at 11.01% compounding monthly D. 12 years at 11.05% compounding twice a year OA AD, B, C, A B. C, B, A, D Oc. D, B, A, C

Answer 1

Effective Rate of Interest = (1 + Nominal Rate/n)^n - 1 where, Nominal Interest Rate is Interest Rate given, n is number of compounding periods by inserting given values in above formula, we get following results for situation A, Effective Rate of Interest is (1 +(0.11/4))^4 - 1 = 11.46% for Situation B, Effective Rate of Interest is (1 + 0.1103/6))^6 - 1 = 11.55% For Situation C, Effective Rate of Interest is (1 + 0.1101/12))^12 - 1 = 11.58% For Situation D, Effective Rate of Interest is (1 + 0.1105/2))^2 - 1 = 11.36% Higherst to Lowest Ranking is C,B,A,D So, Option B is Correct Answer.