In: Finance
Which of the following will result in the largest return? If we invest into an account which pays 10% compounded ______.
a. |
Annually |
|
b. |
Semiannually |
|
c. |
Monthly |
|
d. |
Daily |
EAR=[(1+APR/m)^m]-1
where m=compounding periods
a.EAR=[(1+0.1/1)^1]-1
=10%
b.EAR=[(1+0.1/2)^2]-1
=10.25%
c.EAR=[(1+0.1/12)^12]-1
=10.47%(Approx)
d.EAR=[(1+0.1/365)^365]-1
=10.52%(Approx)
Hence highest return is for 10% compounded daily