Question

Which do you​ prefer: a bank account that pays 5.1 % per year​ (EAR) for three years or

A. An account that pays 2.8 % every six months for three​ years?

B. An account that pays 6.8 % every 18 months for three​ years?

C. An account that pays 0.65 % per month for three​ years? ​

(Note: Compare your current bank EAR with each of the three alternative accounts. Be careful not to round any intermediate steps less than six decimal​ places.)

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If you deposit $ 1 into a bank account that pays 5.1 % per year for three​ years: The amount you will receive after three years is ​[...]?

Answer 1

We can calculate Effective Annual rate (EAR) with following equation -

where,

r = Nominal interest for compounding period

n = No. compounding period in a year.

EAR of Account -A

EAR of Account -B

EAR of Account -C

Account -C pays at EAR of 8.084981% which is greater than 5.1% thus, Account-C is preferable.

2.

EAR = 5.1%

n = 3 years

P =$1

A = Amount to be received after 3 years

thus,

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.