Which account would be preferred by a depositor: an 8 percent APR with monthly compounding or 8.5 percent APR with semi-annual compounding? A)8 percent with monthly compounding B)8.5 percent with semi-annual compounding C)The depositor would be indifferent D)The time period must be known to select the preferred account (1.0667)¹²-1 = 8.3% (1)0425)²-1 = 8.68%

Question

Quizplus · Accepted Answer

The depositor would prefer 8.5% APR with semi-annual compounding because it has a higher effective annual rate (EAR). The formula for EAR is (1+annual rate/number of periods)^number of periods – 1.

For 8% APR with monthly compounding, EAR = (1+0.08/12)^12 – 1 = 8.30%
For 8.5% APR with semi-annual compounding, EAR = (1+0.085/2)^2 – 1 = 8.68%

Therefore, the depositor would earn more interest with 8.5% APR with semi-annual compounding.

Which Account Would Be Preferred by a Depositor: an 8