Which of the following bank accounts has the highest effective annual return?
A) An account that pays 8% nominal interest with daily (365-day) compounding.
B) An account that pays 8% nominal interest with monthly compounding.
C) An account that pays 8% nominal interest with annual compounding.
D) An account that pays 7% nominal interest with daily (365-day) compounding.
E) An account that pays 7% nominal interest with monthly compounding.

Question

Quizplus · Accepted Answer

The account that pays 8% nominal interest with daily compounding will have the highest effective annual return because it compounds the interest more frequently than the other options. This means that the interest earned on the account will be reinvested on a daily basis, resulting in a higher overall return.

Which of the Following Bank Accounts Has the Highest Effective