Your grandmother asks for your help in choosing a certificate of deposit? (CD) f

Question

Your grandmother asks for your help in choosing a certificate of deposit? (CD) from a bank with a? one-year maturity and a fixed interest rate. The first certificate of? deposit, CD? #1, pays 3.953.95 percent APR compounded annually?, while the second certificate of? deposit, CD? #2, pays 4.00 percent APR compounded monthly. What is the effective annual rate? (the EAR) of each? CD, and which CD do you recommend to your? grandmother? If the first certificate of? deposit, CD? #1, pays 3.95 percent APR compounded annually?, the EAR for the deposit is:_____?%. ?(Round to two decimal places)

Explanation / Answer

EAR=(1+APR/m)^m-1
where m=compounding periods

1.First certificate of deposit:

EAR=(1+0.0395/1)^1-1=3.95%

2.Second certificate of deposit:

EAR=(1+0.04/12)^12-1=4.07%(Approx).

Hence second certificate of deposit is recommended having higher EAR.

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