Which one of the following banks has the highest and which one has the lowest EAR for your investment? And WHY? Bank 1: Pays 8.5% APR with monthly compounding. Bank 2: Pays 9% APR with daily compounding. Bank 3: Pays 9% APR with annual compounding. Bank 4: Pays 8.5% APR with daily compounding.

Which one of the following banks has the highest and which one has the lowest EAR for your investment? And WHY? Bank 1: Pays 8.5% APR with monthly compounding. Bank 2: Pays 9% APR with daily compounding. Bank 3: Pays 9% APR with annual compounding. Bank 4: Pays 8.5% APR with daily compounding.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 4QTD

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lu that he accept? Problem 7 EFFECTIVE VERSUS NOMINAL INTEREST RATES. Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5% compounded daily. a. Based on the EAR (or EFF%), which bank should you use? b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest. Page 35 of 161
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