Question

You have a savings account in which you leave the funds for one year without adding to or withdrawing from the account. Which would you rather​ have: a daily compounded rate of 0.035​%, a weekly compounded rate of 0.325​%, a monthly compounded rate of 1.55​%, a quarterly compounded rater of 4.25​%, a semiannually compounded rate of 8.5​%, or an annually compounded rate of 15​%?

Answer 1

EAR of Daily compounding = (1+0.035%)^365-1 = 13.62%
EAR of Weekly compounding = (1+0.325%)^52 -1 = 18.38%
EAR of monthly compounding = (1+1.55%)^12 -1 = 20.27%
EAR of quarterly compounding = (1+4.25%)^4 -1 = 18.11%
EAR of semi annual compounding = (1+8.5%)^2 -1 = 17.72%
EAR of annual compounding = (1+15%) -1 = 15%

EAR is maximum for monthly compounding. Hence monthly compounding should be chosen.

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