You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?
A) Bank 1; 6.1% with annual compounding.
B) Bank 2; 6.0% with monthly compounding.
C) Bank 3; 6.0% with annual compounding.
D) Bank 4; 6.0% with quarterly compounding.
E) Bank 5; 6.0% with daily (365-day) compounding.
Multiple Choice: Problems

Question

Quizplus · Accepted Answer

Bank 5 offers the highest effective rate of interest because it compounds interest daily, which means that interest is added to the principal balance every day. This results in a higher effective rate of interest compared to banks that compound less frequently.

You Plan to Invest Some Money in a Bank Account