Problem 6.32 a-d You are considering three alternative investments: A three-year bank CD paying 7.32 percent compounded quarterly. 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 7.12 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 7.62 percent compounded annually. Calculate effective annual interest rate (EAR)? (Round answer to 2 decimal places, e.g. 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. Click if you would like to Show Work for this question:
Quarterly compounded: | ||||||
Formula: 1(1+ r/4)^n*4 - 1 | ||||||
1(1 + 0.0732/4)^3*4 -1 = 1(1.0183)^12 - 1 = 1.24311 - 1 = 0.24311 | ||||||
Effective Annual Interest Rate = 0.24311/3 = 0.0810 or 8.10% | ||||||
Monthly compounded: | ||||||
Formula: 1(1+ r/12)^n*12 - 1 | ||||||
1(1 + 0.0712/12)^3*12 -1 = 1(1.00593333)^36 - 1 = 1.237346 - 1 = 0.237346 | ||||||
Effective Annual Interest Rate = 0.237346/3 = 0.0791 or 7.91% | ||||||
Annually compounded: | ||||||
Formula: 1(1+ r)^n - 1 | ||||||
1(1 + 0.0762)^3 -1 = 1(1.0762)^3 - 1 = 1.246462 - 1 = 0.246462 | ||||||
Effective Annual Interest Rate = 0.246462/3 = 0.0822 or 8.22% | ||||||
Of the three EAI rates, the annually compounded EAI rate is the highest. |
Problem 6.32 a-d You are considering three alternative investments: A three-year bank CD paying 7.32 percent...
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