Question

The banks in your area offer the following rates of interest on their savings accounts. If you want to open one of these accounts, which bank should you select?

Bank A: 1.845 percent APR with daily compounding.

Bank B: 1.840 percent APR with monthly compounding.

Bank C: 1.875 percent APR with annual compounding.

Bank D: 1.850 percent APR with quarterly compounding.

Bank E: 1.875 percent APR with semi-annual compounding.

	A.	Bank D
	B.	Bank E
	C.	Bank B
	D.	Bank C
	E.	Bank A

Answer 1

EAR=(1+APR/m)^m-1
where m=compounding periods

Bank A:

EAR=(1+0.01845/365)^365-1

=1.862%(Approx).

Bank B:

EAR=(1+0.0184/12)^12-1

=1.856%(Approx).

Bank C:

EAR=(1+0.01875/1)^1-1

=1.875%

Bank D:

EAR=(1+0.0185/4)^4-1

=1.863%(Approx).

Bank E:

EAR=(1+0.01875/2)^2-1

=1.884%(Approx).

Hence Bank E must be selected having highest effective rate.