Which of the following will result in the largest return? If we invest into an account...

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

Solutions

Expert Solution

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

jeff jeffy answered 2 years ago

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