ABC Bank offers term deposits with 8 percent compounded semi-annually, while XYZ Bank offers term deposits with 7.9 percent compounded monthly. We are sure that ABC Bank offers a higher annualized rate of return.

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) needs to be calculated for both banks to determine which offers a higher annualized rate of return. Compounding frequency affects the EAR, and XYZ Bank's monthly compounding could result in a higher EAR despite a lower nominal rate.

ABC Bank Offers Term Deposits with 8 Percent Compounded Semi-Annually