You are looking to invest some money and are comparing bank rates. Bank A has a quoted rate of8.1% compounded semi-annually, while Bank B has a quoted rate of 8% compounded monthly. Which bank provides the better investment opportunity?

Question

Quizplus · Accepted Answer

To compare the two rates, we need to find the equivalent annual rate for each bank. For Bank A, the effective annual rate can be found using the formula:

EAR = (1 + r/n)^n - 1

where r is the quoted rate (8.1%), and n is the number of compounding periods per year (2 for semi-annual). Plugging in the numbers, we get:

EAR = (1 + 0.081/2)^2 - 1 = 0.084

For Bank B, we can find the effective annual rate using the same formula, but with n = 12 (since interest is compounded monthly):

EAR = (1 + 0.08/12)^12 - 1 = 0.0833

Since Bank B has a higher effective annual rate, it provides the better investment opportunity.

You Are Looking to Invest Some Money and Are Comparing