Question

10-36. Talayna has some money that she wants to put into a savings account and she has two

Answer 1

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