Which account has the highest effective annual interest rate? Not necessary but please show how you got your answer.
2 answers:
Answer:
A. 4.20% compounded quarterly
Step-by-step explanation:
The effective annual multiplier on an account with annual interest rate r compounded n times per year is ...
(1 +r/n)^n
When doing multiple evaluations of the same expression, it is convenient to let a spreadsheet or calculator do them from a list of inputs. In the attached, we round the result to 4 decimal places to make comparison easier.
The highest effective rate is 4.2% compounded 4 times per year.
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<em>Example calculation</em>
(1 +0.042/4)^4 = 1.0105^4 = 1.0426661426550625 ≈ 1.0427
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