The effective annual rate (EAR)for a savings account with a stated APR of 4% compounded daily is closest to:
A)4.00%
B)4.10%
C)4.08%
D)4.06%
E)4.05%

Question

Quizplus · Accepted Answer

To calculate the EAR, we need to take into account the effect of compounding. If the account is compounded annually, then the EAR would be 4%. However, since the account is compounded daily, we need to use the formula:

EAR = (1 + r/n)^n - 1

where r is the annual interest rate (0.04), and n is the number of times the interest is compounded per year (365 for daily compounding).

EAR = (1 + 0.04/365)^365 - 1
    = 0.0408
    = 4.08%

Therefore, the closest answer is C) 4.08%.

The Effective Annual Rate (EAR)for a Savings Account with a Stated