Bank One offers a passbook account with a 4.75% annual rate, compounded quarterly.Bank Two offers a money market account at 4.5%, compounded monthly.Find the better growth by calculating the
Effective rates.What is the greater effective rate?
A)4.59%
B)0.05%
C)0.05%.
D)4.84%
E)none of the above

Question

Quizplus · Accepted Answer

To find the effective rate, we can use the formula:

Effective rate = (1 + (nominal rate / number of times compounded))^number of times compounded - 1

For Bank One:
Nominal rate = 4.75%
Number of times compounded = 4 (quarterly)
Effective rate = (1 + (0.0475 / 4))^4 - 1 = 4.84%

For Bank Two:
Nominal rate = 4.5%
Number of times compounded = 12 (monthly)
Effective rate = (1 + (0.045 / 12))^12 - 1 = 4.59%

Therefore, the better growth option is Bank One with an effective rate of 4.84%.

Bank One Offers a Passbook Account with a 4