Question

Assume Brad has a choice between two deposit accounts. Account WH has an annual percentage rate of​ 7.35% with interest compounded continuously. Account MW has an annual percentage rate of​ 7.45% with interest compounded monthly. Which account provides the highest effective annual​ return?

Answer 1

Answer: Account MW which compounds monthly provides a higher effective rate at 7.71%

Explanation:

Use the Effective Interest rate formula to see which offers the higher return.

Account WH;

Compounded continuously;

= e^(interest rate) - 1

= e^7.35% - 1

= 7.63%

Account MW

Compounded per month

= (( 1 + interest / compounding period) ^ period) - 1

=  (( 1 + 7.45%/12) ^ 12) -1

= 7.71%