Which of the following bank accounts has the lowest effective annual return? An

Question

Which of the following bank accounts has the lowest effective annual return? An account that pays 8% nominal interest with monthly compounding. An account that pays 8% nominal interest with annual compounding. An account that pays 7% nominal interest with daily (365-day) compounding. An account that pays 7% nominal interest with monthly compounding. An account that pays 8% nominal interest with daily (365-day) compounding. Which of the following bank accounts has the lowest effective annual return? An account that pays 8% nominal interest with monthly compounding. An account that pays 8% nominal interest with annual compounding. An account that pays 7% nominal interest with daily (365-day) compounding. An account that pays 7% nominal interest with monthly compounding. An account that pays 8% nominal interest with daily (365-day) compounding. An account that pays 8% nominal interest with monthly compounding. An account that pays 8% nominal interest with annual compounding. An account that pays 7% nominal interest with daily (365-day) compounding. An account that pays 7% nominal interest with monthly compounding. An account that pays 8% nominal interest with daily (365-day) compounding. An account that pays 8% nominal interest with monthly compounding.

Explanation / Answer

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

1) r =0.08 , m =12

EAR = 0.08299 = 8.3%

2)r = 0.08 , m = 1

EAR = 8%

3) r = 0.07 , m =365

EAR = 0.07250 = 7.25%

4)r = 0.07 , m = 12

EAR = 0.0723 = 7.23%

5)r = 0.08 , m = 365

EAR = 0.0833 = 8.33%

An account that pays 7% nominal interest with monthly compounding has the lowest EAR.

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