Question

Which do you​ prefer: a bank account that pays 5.4% per year​ (EAR) for three years or

a. An account that pays 2.7 % every six months for three​ years?                   

b. An account that pays 7.5 %every 18 months for three​ years?                   

c. An account that pays 0.31% per month for three​ years?

​(Note: Compare your current bank EAR with each of the three alternative accounts. Be careful not to round any intermediate steps less than six decimal​ places.)         

Answer 1

We have given Effective annual rate = 5.4%

Option A) 2.7% for every Six Months

Effective Annual rate = (1 + R)^N - 1

Where, R is rate oer period

N is Number of period

= (1 + 2.7%)^2 - 1

= 1.054729 - 1

= 0.054729 or 5.4729%

Option B) 7.5% for every 18 Months

Effective Annual Rate = ( 1 + 7.5%)^ (12/18)

= 1.049394965 - 1

= 0.049394965 or 4.939496%

Option C: 0.31% every Months

Effective Annual Rate = ( 1 + 0.31%)^12

= 1.0031^12

=1.037840859 - 1

EAR = 3.7840859%

The EAR of Option A is the highest