Bank Second to Last Chance offers a savings rate of 6% compounded four times per year,...

Bank Second to Last Chance offers a savings rate of 6% compounded four times per year, while Bank Last Chance offers a savings rate of 6% compounded annually. What is the effective annual rate of the higher offered rate?

Solutions

Expert Solution

EAR is calculated as follows,
EAR = (1+(i/n))n-1
Where,
i means nominal interest rate
n means no of compounding periods per year

If compounded four times per year,
EAR = (1+(i/n))n-1
EAR = (1+(0.06/4))4-1
EAR = 6.14%

If compounded annually
EAR = (1+(i/n))n-1
EAR = (1+(0.06/1))1-1
EAR = 6%

Higher offered rate is 6% compounded four times per year.

jeff jeffy answered 1 year ago

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