Question

Periodic interest rates.

  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 0.040​%, a weekly compounded rate of 0.305​%, a monthly compounded rate of 1.45​%, a quarterly compounded rater of 4.00​%,a semiannually compounded rate of 7​%, or an annually compounded rate of 14​%?

How does this get entered in a financial calculator? I have 10bii app

Answer 1

Daily compounded rate:
I/Y=0.040%
N=365
PV=-1
PMT=0
CPT FV=1.157162407

Weekly compounded rate:
I/Y=0.305%
N=7
PV=-1
PMT=0
CPT FV=1.021546349

Monthly compounded rate:
I/Y=1.45%
N=12
PV=-1
PMT=0
CPT FV=1.188569595

Quarterly compounded rate:
I/Y=4%
N=4
PV=-1
PMT=0
CPT FV=1.16985856

Semi-annually compounded rate:
I/Y=7%
N=2
PV=-1
PMT=0
CPT FV=1.1449

Annually compounded rate:
I/Y=14%
N=1
PV=-1
PMT=0
CPT FV=1.14

Hence, if we are lending/depositing we will choose monthly compounded rate of 1.45% because it has the higher future value (or FV)

However, if we are borrowing we will choose weekly compounded rate of 0.305% because it has the lowest future value (or FV)