Answer:
Option 1
Step-by-step explanation:
Effective Interest Rate = [ 1 + ( r / m) ]^ mt - { 1 }
where i = nominal interest rate , n = number of compounding per time period, t = number of time periods
Option 1 : Interest rate 'i' = 2% , Quarterly compounding 'n' = 4 , t = 25 years
EAR = [ 1 + 2% / 4 ]^ (4 x 25) - [ 1 ] = 0.6466 , ie 64.66%
Option 2 : Interest rate 'i' = 2% , Monthly compounding 'n' = 12 , t = 25 years
EAR = [ 1 + 1.5% / 12 ] ^ (12 x 25) - [ 1 ] = 0.4546 , ie 45.46%
As option 1 has higher EAR than option 2, former is better than latter
