A bank CD that pays 8.16 percent compounded monthly. Calculate effective annual

Question

A bank CD that pays 8.16 percent compounded monthly. Calculate effective annual interest rate (EAR)? (Round answer to 2 decimal places, e.g. 15.25%.) Effective annual rate_____________% A bank CD that pays 8.36 percent compounded annually. Calculate effective annual interest rate (EAR)? (Round answer to 2 decimal places, e.g. 15.25%.) Effective annual rate___________ % A bank CD that pays 8.16 percent compounded semi-annually. Calculate effective annual interest rate (EAR)? (Round answer to 2 decimal places, e.g. 15.25%.) Effective annual rate____________% A bank CD that pays 7.91 percent compounded daily (on a 365-day basis). Calculate effective annual interest rate (EAR)? (Round answer to 2 decimal places, e.g. 15.25%.) Effective annual rate__________% Which of the above investments has the highest effective annual interest rate (EAR)? The bank CD that pays__________________ has the highest yield.

Explanation / Answer

m = 4, EAR = (1 + 0.08/4)4 - 1 = 0.0824. The effective interest rate with quarterly compounding is 8.24%. Method 2 - Texas Instruments: You will use the Interest Conversion (ICONV) worksheet 1. Press 2nd ICONV to select the worksheet 2. NOM will be displayed with the previous value 3. Press 2nd [CLR WORK] to clear the worksheet Proceed as shown below Keystrokes: Display 2nd ICONV: NOM = previous value 2nd CLRWORK: NOM = 0.00 8 ENTER: NOM = 8.00 DownArrow: EFF = 0.00 DownArrow: C/Y = previous value 4 ENTER: C/Y = 4.00 DownArrow: EFF = 0.00 CPT: EFF = 8.24

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