Homework: Chapter 5 Homework Save 11 of 11 (8 complete) Score: 0 of 1 pt P5-37 (

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Homework: Chapter 5 Homework Save 11 of 11 (8 complete) Score: 0 of 1 pt P5-37 (similar to (Related to Checkpoint 5.7 HW Score: 72.73%, 8 of 11 pts Question Help * Calculating an EAR) Your grandmother as s or your help n choosing a certificate o deposit CD from a bank with a one-year maturity and a fixed interest rate The rst certificate o deposit CD #1. pays 195 percent APR compounded monthly while the second certificate or dep si CD #2 pays 2.00 percent APR compounded quarter y What s e e ective annual rate e EAR of each CD, and hi CD do you recommend to your grandmother? irthe first certificate of deposit. CD #1, pays 1.95 percent APR compounded monthly, the EAR for the deposit is O96. (Round to two decimal places.) Enter your answer in the answer box and then click Check Answer.

Explanation / Answer

EAR = (1+Rate/Frequency)^Frequency -1

1.

CD #1

EAR = (1+Rate/12)^12 -1 = (1+1.95%/12)^12-1 =

1.97%

2.

CD #2

EAR = (1+Rate/4)^4 - 1 = (1+2%/4)^4-1 =

2.02%

CD# pays more interest i.e. EAR = 2.02% hence, CD #2 should be recommended.

EAR = (1+Rate/12)^12 -1 = (1+1.95%/12)^12-1 =

1.97%

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