Question

I have three investment alternatives: The first one pays 3.6% APR with monthly compounding, the second one pays 3.5% APR with weekly compounding, and the third one pays 3.7% APR with quarterly compounding. What is the effective annual rate for each one and which one should I choose? What would be your second choice? Rank them.

Answer 1

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

EAR for choice:

1=[(1+0.036/12)^12]-1

=3.66%(Approx)

2=[(1+0.035/52)^52]-1

=3.56%(Approx)

3=[(1+0.037/4)^4]-1

=3.75%(Approx)

Choice	EAR	Rank
1	3.66%(Approx)	2
2	3.56%(Approx)	3
3	3.75%(Approx)	1