Which account is better, an account paying a nominal interestrate of 24% compounded monthly or...

Which account is better, an account paying a nominal interest rate of 24% compounded monthly or an account paying a nominal interest rate of 25% compounded semiannually?

Solutions

Expert Solution

We know that,

EAR = (1+ periodic rate)^no. of periods - 1

Nominal interest rate of 24% compounded monthly:

EAR = (1+ 0.24/12)^12 - 1 = 26.82%

Nominal interest rate of 25% compounded semiannually:

EAR = (1+ 0.25/2)^2 - 1 = 26.56%

Since the EAR of nominal interest rate of 24% compounded monthly is higher, we will consider this.

jeff jeffy answered 2 years ago

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