Question

Assume JP Morgan has a choice between two deposit accounts.

Account A has an annual percentage rate of 7.55 percent but with interest compounded monthly.

Account B has an annual percentage rate of 7.45 percent with interest compounded quarterly.

Which account provides the highest effective annual return?

Answer 1

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

EAR for Account A=[(1+0.0755/12)^12]-1

=7.817%(Approx)

EAR for Account B=[(1+0.0745/4)^4]-1

= 7.661%(Approx)

Hence highest EAR is for Account A.