Question

Rank the following certificates of deposit from highest to lowest effective rates:

A) 4 years at 18.03% compounding every other month

B) 4 years at 18.10% compounding quarterly

C) 2 years at 18.00% compounding monthly

D) 2 years at 17.90% compounding twice a month

Answer 1

Effective rate of interest = [( 1 + Nominal Interest rate/Number of Compounding)^Number of Compounding] - 1

A) 4 years at 18.03% compounding every other month

= ( 1 + 18.03%/6)^6 -1

= (1.03005^6) -1

Effective annual rate = 0.19440012096

B) 4 years at 18.10% compounding quarterly

= ( 1 + 18.10%/4)^4 -1

= 1.04525^4 -1

Effective annual rate = 0.19366017632

C) 2 years at 18.00% compounding monthly

= ( 1 + 18.00%/12)^12 -1

= (1.015)^12 -1

Effective annual rate = 0.19561817146

D) 2 years at 17.90% compounding twice a month

= ( 1 + 17.90%/24)^24 -1

= (1.00745833333)^24 -1

Effective annual rate = 0.19522658667

So, we have computed the Effective annual rate, So Highest to lowest will be C,D,A,B