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An investor who is attempting to compare equally risky certificates of deposit (CD) investments with different...

An investor who is attempting to compare equally risky certificates of deposit (CD) investments with different compounding periods per year should compare the ________ interest rate for each investment.
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Answer #1

Actual amount of interest paid or received during a given period will be different if the compounding frequency is different for different deposits or loans, even if the all other determinants like principal, tenure and interest rate are the same. This is because of application of interest on the interest charged earlier.

Effective Annual Rate (EAR) is the resultant interest rate applicable for an year, taking into account of the compounding effect within the year.

Hence an investor who is attempting to compare equally risky certificates of deposits (CD) investments with different compounding periods per year should compare the Annual Effective Rate (EAR) for each investment.

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