Use the table for the question(s)below.
Consider the following investment alternatives:
-The highest effective rate of return you could earn on any of these investments is closest to:
A)6.250%.
B)6.267%.
C)6.295%.
D)6.310%.

Question

Use the table for the question(s)below.
Consider the following investment alternatives: 
-The highest effective rate of return you could earn on any of these investments is closest to:
A)6.250%. 
B)6.267%. 
C)6.295%. 
D)6.310%.

Quizplus · Accepted Answer

The effective rate of return is the interest rate that would yield the same return as the investment with fees and compound interest taken into account. To determine which investment has the highest effective rate of return, we need to calculate the effective rate for each option.

For option 1, the effective rate of return is:

(1 + (0.05/12))^12 - 1 - 0.03 = 0.062457, or 6.2467%.

For option 2, the effective rate of return is:

(1 + (0.065/2))^2 - 1 - 0.025 = 0.062518, or 6.2518%.

For option 3, the effective rate of return is:

(1 + (0.065/4))^4 - 1 - 0.025 = 0.062951, or 6.2951%.

For option 4, the effective rate of return is:

(1 + (0.0675/2))^2 - 1 - 0.02 = 0.063102, or 6.3102%.

Therefore, option 4 has the highest effective rate of return at 6.310%. The answer is C.

Use the Table for the Question(s)below