Question

# Two local banking institutions offer the following interest on deposits: Blue Bank: 3% annual compounded semi-annually...

Two local banking institutions offer the following interest on deposits:

Blue Bank: 3% annual compounded semi-annually

Red Bank: 2.95% per year compounded monthly

Determine which of the following items is not true:

Select one:
a. The Red Bank offers better interest because it calculates the interest monthly so it accumulates more frequently and is therefore more attractive.
b. The APY (Annual Percentage Yield) of the Blue Bank is 3,022% per year.
c. The effective interest rate of the Red Bank is 2,990% per year
d. The APR (Annual Percentage Rate) of Red Bank is 2.95%

solution:

The EAR (or APY) formula = (1+APR/m)^m -1

The EAR for Blue bank = (1+3%/2)^2-1 = 3.022%

The EAR for Red bank = (1+2.95%/12)^12-1 = 2.99%

Option B ) APY of Blue bank is 3.022% and this statement is correct

Option C) EAR of Red bank is 2.99% and this statement is correct

Option D) APR of Red Bank is 2.95% and this statement is correct

Option A) is incorrect as EAR of Blue bank is higher than Red Bank even though the compounding period is monthly in case of Red Bank

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