Bank One offers a passbook account with a 4.35% annual rate, compounded quarterly.Bank Two offers a money market account at 4%, compounded monthly.Find the better growth by calculating the
Effective rates.What is the greater effective rate?
A)0.04%
B)0.04%.
C)4.07%
D)4.42%
E)none of the above

Question

Quizplus · Accepted Answer

To calculate the effective rate, we use the formula (1 + (r/n))^n - 1, where r is the annual rate and n is the number of times compounded per year.

For Bank One:
Effective rate = (1 + (0.0435/4))^4 - 1 = 0.0442 or 4.42%

For Bank Two:
Effective rate = (1 + (0.04/12))^12 - 1 = 0.0407 or 4.07%

Therefore, Bank One has the greater effective rate and is the better choice.

Note: Option A and B are duplicates.

Bank One Offers a Passbook Account with a 4