Question

In: Finance

Which of the following bank certificates of deposit (CD) will give you the highest future value...

Which of the following bank certificates of deposit (CD) will give you the highest future value for a given investment over 3 years?

Group of answer choices:

A. A CD paying 3% nominal annual interest with semi-annual compounding.

B. A CD paying 3.5% nominal annual interest with daily compounding.

C. A CD paying 3.5% nominal annual interest with quarterly compounding.

D. A CD paying 3% nominal annual interest with annual compounding.

Solutions

Expert Solution

Ans:- we will first find the effective interest rate (EAR) of all the options and will choose the option which has the highest effective rate of interest. Higher is the EAR, higher will be the future value.

EAR = (1+r/n)^n-1, where r is the annual rate and n is the number of times compounding per year.

From the above analysis, option B has the highest EAR value, therefore it will give the highest future value of CD if invested for 3 year period.

Note:- If this answer helps you pls give thumbs up.

jeff jeffy answered 2 years ago
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