Question

Which do you​ prefer: a bank account that pays

4.5 %

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

7.3 %

every 18 months for three​ years?                   

c. An account that pays

0.37%

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

Let 100 be the initial investment. Let's compare the results of different options:

Compound interest formula is Amount = Principal (1+ interest rate/no of times interest is compounded per year)^(no of times interest is compounded per year* years)

Option	Formula	Value
4.5 % per year​ for three years	=100*(1+(4.5%/1))^(1*3)	114.116612
2.7 % every six months for three​ years	=100*(1+(2.7%/2))^(2*3)	108.378346
7.3 % every 18 months for three​ years	=100*(1+(7.3%/0.67))^(0.67*3)	123.105416
An account that pays 0.37% per month for three​ years	=100*(1+(0.37%/12))^(12*3)	101.116010

Based on the values, I will select an account that pays 7.3 % every 18 months for three​ years.