Which of the following accounts has the highest EAR?
A)one that pays 6.1% every six months
B)one that pays 1.0% per month
C)one that pays 12.6% per year
D)one that pays 3% every three months

Question

Quizplus · Accepted Answer

To compare different interest rates, we need to find the Effective Annual Rate (EAR) for each. The formula for EAR is: (1 + (APR/m))^m - 1, where APR is the Annual Percentage Rate and m is the number of compounding periods per year.

Using this formula, we get: 
A) EAR = (1 + (0.061/2))^2 - 1 = 0.0623 or 6.23%
B) EAR = (1 + (0.01/1))^1 - 1 = 0.01005 or 10.05%
C) EAR = (1 + 0.126/1)^1 - 1 = 0.126 or 12.6%
D) EAR = (1 + (0.03/4))^4 - 1 = 0.0304 or 3.04%

Therefore, the account with the highest EAR is the one that pays 1.0% per month (option B).

Which of the Following Accounts Has the Highest EAR