Question

Suppose you need to deposit money in a savings account. Bank X offers a rate of 10.200% compounded monthly; Bank Y offers a rate of 10.150% compounded quarterly; Bank Z offers a rate of 10.400% compounded annually. Which bank is best for you?

Group of answer choices

Bank X

Bank Y

Not enough information to answer

Bank Z

Answer 1

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

EAR for Bank:

X=[(1+0.102/12)^12]-1

=10.691%(Approx)

Y=[(1+0.1015/4)^4]-1

=10.543%(Approx)

Z=[(1+0.104/1)^1]-1

=10.4%

Hence Bank X must be selected having highest effective annual return