Question

You are considering investing your money in a bank certificate of deposit (that is, lending money to a bank). You have received the following quotations from four banks. Which bank should you select?

Bank A: APR of 3.48 percent compounded annually

Bank B: APR of 3.44 compounded semi-annually

Bank C: APR of 3.36 compounded monthly

Bank D: APR of 3.38 percent compounded daily

Bank E: APR of 3.41 compounded continuously

Group of answer choices

Bank C

Bank E

Bank D

Bank A

Bank B

Answer 1

- Calculating the effective Annual rate(EAR) of each bank's Nominal rate to arrive at bank should you select:-

i). Bank A: APR of 3.48 percent compounded annually

Where,

r = Interest rate = 3.48%

m = no of times compounding in a year = 1

EAR = 1.0348 - 1

EAR = 3.48%

ii). Bank B: APR of 3.44 compounded semi-annually

Where,

r = Interest rate = 3.44%

m = no of times compounding in a year = 2

EAR = 1.034696 - 1

EAR = 3.4696%

iii).Bank C: APR of 3.36 compounded monthly

Where,

r = Interest rate = 3.36%

m = no of times compounding in a year = 12

EAR = 1.034122- 1

EAR = 3.4122%

iv).Bank D: APR of 3.38 percent compounded daily

Where,

r = Interest rate = 3.38%

m = no of times compounding in a year = 365

EAR = 1.034376- 1

EAR = 3.4376%

v). Bank E: APR of 3.41 compounded continuously

EAR = e^r - 1

EAR = e^(0.0341) - 1

EAR = 1.034688 - 1

EAR = 3.4688%

Conclusion- Bank A has highest Effective annual rate among other banks so Bank A should be choosen

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