Question

Which do you​ prefer: a bank account that pays 5.7% per year​ (EAR) for three years or a. An account that pays 2.2% every six months for three​ years? b. An account that pays 7.1% every 18 months for three​ years? c. An account that pays 0.42% 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

a) 2.2% every six months for three years

EAR = (1 + 0.022)^2 - 1 = 0.044484

EAR of option a) is 4.4484%

b) An account that pays 7.1% every 18 months for three years

EAR = (1 + 0.071)^(12/18) - 1 = 0.04679019778

EAR of option b) is 4.679019778%

c) An account that pays 0.42% per month for three years

EAR = (1 + 0.0042)^12 - 1 = 0.05158069443

EAR of option c) is 5.158069443%

Of all the options, the highest EAR is the bank that pays 5.7% per EAR for three years. This is the one we would prefer.

Can you please upvote? Thank You :-)