LeGo Financials offer two investment plans. Investment A pays 9 percent interest compounded monthly, whereas Investment B pays 10 percent interest compounded semiannually. What are the effective annual rates of the two investments?

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) for Investment A is calculated using the formula: EAR = (1 + i/n)^(n*t) - 1, where i is the nominal rate, n is the number of compounding periods per year, and t is the number of years. For Investment A: EAR = (1 + 0.09/12)^(12*1) - 1 = 9.38%. For Investment B: EAR = (1 + 0.10/2)^(2*1) - 1 = 10.25%.

LeGo Financials Offer Two Investment Plans