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

Question

Quizplus · Accepted Answer

A 6 percent rate with monthly compounding will generate the highest effective annual rate (EAR) because compounding more frequently will result in a higher EAR. The formula for EAR is (1 + (APR/m))^m - 1, where m is the number of compounding periods in a year. In this case, option A has the highest value of m (12), resulting in the highest EAR.

You Are Deciding Among Several Different Bank Accounts