Periodic interst rates. You have a savings account in which you leave the funds

Question

Periodic interst rates. You have a savings account in which you leave the funds for one year without adding or withdrawing from the account. Which would you rather have: a daily compounded rate of 0.045%, a weekly compounded rate of 0.325%, a monthly compounded rate of 1.25%, a quarterly compounded rater of 4.00%, a semiannually compounded rate of 9%, or an annually compounded rate of 14%?

What is the effective annual (EAR) of a daily compounded rate of 0.050%?

_____(round to two decimal places)

Explanation / Answer

ANS:- At 16.425% (0.045*365) compounded 365 times per year the effective annual rate calculated is

i = (1 + r/m)m - 1

= (1 + 0.16425/365)^365 - 1

(1.00045)^365

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