You are deciding among several different bank accounts. Which of the following will generate the highest effective annual rate (EAR)?
A) A 6% rate with monthly compounding
B) A 6% rate with annual compounding
C) A 6.08% rate with annual compounding
D) A 6% rate with quarterly compounding

Question

Quizplus · Accepted Answer

The highest EAR will be generated by an account with more frequent compounding. Therefore, option A with monthly compounding will generate a higher EAR than option B with annual compounding or option D with quarterly compounding. Option C has a higher stated rate than option A, but since both have annual compounding, option A with monthly compounding will actually generate a higher EAR.

You Are Deciding Among Several Different Bank Accounts