Which account would be preferred by a depositor: an 8% APR with monthly compounding or 8.5% APR with semiannual compounding?
A) 8.0% with monthly compounding.
B) 8.5% with semiannual compounding.
C) The depositor would be indifferent.
D) The time period must be known to select the preferred account.

Question

Quizplus · Accepted Answer

The depositor would earn a higher effective annual rate with the account offering 8.5% with semiannual compounding, as it compounds only twice a year. This would result in an effective annual rate of 8.573%, compared to the 8.3% effective annual rate earned from the 8% APR account with monthly compounding. Therefore, the account offering 8.5% with semiannual compounding would be preferred.

Which Account Would Be Preferred by a Depositor: an 8