Question

The following four banks give their the APY (annual percentage yield) quote on saving: Bank A: 5% APY, annually compounding Bank B: 5% APY, quarterly compounded Bank C: 4.8% APY, monthly compounding Bank D: 4.85% APY, Daily compounding The EAR of the bank that offers the best deal on saving is %?

Answer 1

Bank A

EAR = [(1 +stated rate/no. of compounding periods) ^no. of compounding periods - 1]* 100

Effective Annual Rate = ((1+5/1*100)^1-1)*100

Effective Annual Rate% = 5

Bank B

EAR = [(1 +stated rate/no. of compounding periods) ^no. of compounding periods - 1]* 100

Effective Annual Rate = ((1+5/4*100)^4-1)*100

Effective Annual Rate% = 5.09

Bank C

EAR = [(1 +stated rate/no. of compounding periods) ^no. of compounding periods - 1]* 100

Effective Annual Rate = ((1+4.8/12*100)^12-1)*100

Effective Annual Rate% = 4.91

Bank D

EAR = [(1 +stated rate/no. of compounding periods) ^no. of compounding periods - 1]* 100

Effective Annual Rate = ((1+4.85/365*100)^365-1)*100

Effective Annual Rate% = 4.97

Bank B has highest EAR and gives the best deal