Question

Assume Julian has a choice between two deposit accounts. Account A has an annual percentage rate of 7.55 percent but with interest compounded quarterly. Account B has an annual percentage rate of 7.50 percent with interest compounded daily. Which account provides the highest effective annual return?

Account A

Account B

Both provide the same effective annual return.

We don't have sufficient information to make a choice.

Answer 1

EAR=[(1+APR/m)^m]-1
where m=compounding periods

A:

EAR=[(1+0.0755/4)^4]-1

=7.767%(Approx)

B:

EAR=[(1+0.075/365)^365]-1

=7.788%(Approx)

Hence highest EAR is of Account B.