Question

You can deposit your savings at the Texas Capital Bank, which offers to pay 13.6 percent annually, interest compounded quarterly, or at Midfirst Bank, which will pay interest of 13.4 percent annually, compounded daily. With this information, which bank’s offer should you choose?

Texas Capital Bank because its Effective Annual Rate (EAR) is higher.

Midfirst Bank because its EAR is higher.

Midfirst Bank because the nominal rate (Inom) is lower

Texas Capital Bank because the (Inom) is higher.

Cannot compare, because the effective rates cannot be computed.Next

Answer 1

- To choose which Bank offers the best Interest rate we will compute Effective Annual Rate(EAR) of both the bank's Interest rate:-

a). Texas Capital Bank, which offers to pay 13.6 percent annually, interest compounded quarterly

calculating EAR:-

Where,

r = Interest rate = 13.6%

m = no of times compounding in a year = 4 (compounded quarterly)

EAR = 1.14309 - 1

EAR = 14.309%

b). Midfirst Bank, which will pay interest of 13.4 percent annually, compounded daily

calculating EAR:-

Where,

r = Interest rate = 13.4%

m = no of times compounding in a year = 365 (compounded daily)

EAR = 1.14336 - 1

EAR = 14.336%

- Thus, we should choose Midfirst Bank as it offers highest EAR.

Option 1. Midfirst Bank because its EAR is higher.

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