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Problem 6.32 a-d You are considering three altemative investments: A three-year bank CD paying 7.72 percent compounded quarterly. Calculate effective annual interest rate EAR)? (Round answer to 2 decimal places, eg. 15.25%.) Effective annual rate A three-year bank CD paying 7.52 percent compounded monthly. Calculate effective annual interest rate EAR ? (Round answer to 2 decimal places, e g 15.25% ) Effective annual rate A three-year bank CD paying 8.02 percent compounded annually. Calculate effective annual interest rate (EAR)? (Round answer to 2 decimal places, eg. 15.25%.) Effective annual rate Which of the above investments has the highest effective annual interest rate (EAR)? The three-year bank CD paying has the highest effective yield. tion: Open Show Work

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Answer #1

EAR=(1+APR/m)^m-1
where m=compounding periods

a.EAR=(1+0.0772/4)^4-1

=7.95%(Approx).

b.EAR=(1+0.0752/12)^12-1

=7.78%(Approx).

c.EAR=(1+0.0802/1)^1-1

=8.02%

Hence the three year bank CD paying 8.02% compounded annually has the highest effective yield.

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