ICICI quotes nominal annual interest rate of 6.6% compounded annually, 6.5% compounded semi-annually and 6.4% compounded monthly on 5 year compound interest GICs. What rate should an investor choose?
A) 6.6% compounded annually
B) 6.5% compounded semi-annually
C) 6.4% compounded monthly
D) Any, as all alternatives are same
E) Insufficient data to make a decision

Question

Quizplus · Accepted Answer

The effective annual interest rate for each option is as follows:

- 6.6% compounded annually: (1 + 0.066)^1 - 1 = 0.066 or 6.6%
- 6.5% compounded semi-annually: (1 + 0.065/2)^2 - 1 = 0.0661225 or 6.61225%
- 6.4% compounded monthly: (1 + 0.064/12)^12 - 1 = 0.0662466 or 6.62466%

Since the investor is looking for the highest rate, the option with the highest effective annual interest rate should be chosen. In this case, it is option B, which has an effective annual interest rate of 6.61225%. Therefore, the investor should choose 6.5% compounded semi-annually.

ICICI Quotes Nominal Annual Interest Rate of 6