Bank One offers a passbook account with a 3.55% annual rate, compounded quarterly.Bank Two offers a money market account at 3.5%, compounded monthly.Find the better growth by calculating the
Effective rates.What is the greater effective rate?
A)3.60%
B)3.56%
C)0.04%
D)0.04%.
E)none of the above

Question

Quizplus · Accepted Answer

We can calculate the effective rate for Bank One using the formula: 
Effective rate = (1 + (annual rate / n))^n - 1, where n is the number of times compounded per year. 
Plugging in the numbers, we get: 
Effective rate for Bank One = (1 + (0.0355 / 4))^4 - 1 = 0.0360 or 3.60%

Similarly, we can calculate the effective rate for Bank Two as:
Effective rate for Bank Two = (1 + (0.035 / 12))^12 - 1 = 0.0356 or 3.56%

Comparing the two, we can see that the better growth is offered by Bank One with an effective rate of 3.60%. Therefore, the best choice would be Bank One.

Bank One Offers a Passbook Account with a 3