Question

Rank the following certificates of deposit from highest to lowest effective rates:

A 4 years at 18.03% compounding every other month

B 4 years at 18.10% compounding quarterly

C 2 years at 18.00% compounding monthly

D 2 years at 17.90% compounding twice a month

A. D, C, A, B

B. C, D, A, B

C. B, A, C, D

Answer 1

Effective Rate = ( 1 + r )^n

n = No. of times compounded over give deposit period.

r = Int Rate per period

OPtion A:

Particulars	Amount
Ret period	1.5025%
No. of periods	48.0000

Effective Rate = [ ( 1 + r ) ^ n ] - 1
= [ ( 1 + 0.015025 ) ^ 48 ] - 1
= [ ( 1.015025 ) ^ 48 ] - 1
= [ 2.0459 ] - 1
= 1.0459
I.e Effective Rate is 104.59 %

OPtion B:

Particulars	Amount
Ret period	4.5075%
No. of periods	16.0000

Effective Rate = [ ( 1 + r ) ^ n ] - 1
= [ ( 1 + 0.045075 ) ^ 16 ] - 1
= [ ( 1.045075 ) ^ 16 ] - 1
= [ 2.0247 ] - 1
= 1.0247
I.e Effective Rate is 102.47 %

OPtion C:

Particulars	Amount
Ret period	1.5000%
No. of periods	24.0000

Effective Rate = [ ( 1 + r ) ^ n ] - 1
= [ ( 1 + 0.015 ) ^ 24 ] - 1
= [ ( 1.015 ) ^ 24 ] - 1
= [ 1.4295 ] - 1
= 0.4295
I.e Effective rate is 42.95 %

OPtion D:

Particulars	Amount
Ret period	0.7458%
No. of periods	48.0000

Effective Rate = [ ( 1 + r ) ^ n ] - 1
= [ ( 1 + 0.007458 ) ^ 48 ] - 1
= [ ( 1.007458 ) ^ 48 ] - 1
= [ 1.4286 ] - 1
= 0.4286
I.e Effective Rate is 42.86 %

Highest to Lowest:

A, B , C and D