Question

24. If Bank Yankees offers you 12% with monthly compounding on your investment, and Bank Braves offers you 11.8% with daily compounding, which Bank should you invest with?

Answer 1

1. Effective Annual Interest rate of Bank Yankees = (1 + r/12)^n*12 - 1

r= Interest rate; n = no. of years

Effective Annual Interest rate of Bank Yankees = (1 + 12%/12)^1*12 - 1

Effective Annual Interest rate of Bank Yankees = (1.01)^12 - 1

Effective Annual Interest rate of Bank Yankees = 12.68%

2. Effective Annual Interest rate of Bank Braves = (1 + r/365)^n*365 - 1

r= Interest rate; n = no. of years

Effective Annual Interest rate of Bank Yankees = (1 + 11.8%/365)^1*365 - 1

Effective Annual Interest rate of Bank Yankees = (1.000323)^365 - 1

Effective Annual Interest rate of Bank Yankees = 12.52%

Bank Yankees is providing more effective interest rate when compared with Bank Braves thus i would invest in Bank Yakees