You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

Question

Quizplus · Accepted Answer

By inspection, we can see that e dominates b, c, and d because, with the same interest rate, the account with the most frequent compounding has the highest EFF%. Thus, the correct answer must be either a or e. However, we cannot tell by inspection whether a or e provides the higher EFF%. We know that with one compounding period an EFF% is 6.1%, so we can calculate e's EFF%. It is 6.183%, so e is the correct answer.
 $\begin{array}{l}
\text { a. } \quad(1+0.061 / 12)^{12-1}=6.100 \% \
\text { e. } \quad(1+0.06 / 365)^{365-1}=6.183 \%
\end{array}$

You Plan to Invest Some Money in a Bank Account