Question

Question 4 Which of the following bank accounts has the LOWEST effective annual return? An account that pays 12% nominal interest with monthly compounding. An account that pays 13% nominal interest with quarterly compounding. An account that pays 13% nominal interest with semiannual compounding. An account that pays 12% nominal interest with daily compounding

Answer 1

A E F H 12% 4 B с D G 49 Calculation of EAR 50 S.No. Nominal interest rate No. of times compounding Effective Rate 51 1 Monthly 12 12.68% Lowest 52 2 13% Quarterly 13.65% 53 3 13% Semi annually 2 13.42% 54 4 12% Daily 365 12.75% 55 56 Hence, An account that pays 12% nominal interest rate with monthly compounding will have the lowest effective annual rate. 57 So. The ans is a.An account that pays 12% nominal interest rate with monthly compounding 58 Note - 59 EAR = (1+Nominal rate/No. of Compounding Periods)“ No. of compounding Periods -1 60 61 62

B с D E F A 49 Calculation of EAR 50 S.No. 51 1 52 2 53 3 54 4 Lowest Nominal interest rate 0.12 0.13 0.13 0.12 No. of times compounding Monthly 12 Quarterly 4 Semi annually 2 Daily 365 Effective Rate =(1+B51/D51)^D51-1 =(1+B52/D52)^D52-1 =(1+B53/D53)^D53-1 =(1+B54/D54)^D54-1 55 56 Hence, An account that pays 12% nominal interest rate with monthly compounding will have the lowest effective annual rate. 57 So. The ans is a.An account that pays 12% nominal interest rate with monthly compounding 58 Note - 59 EAR = (1+Nominal rate/No. of Compounding Periods)^ No. of compounding Periods-1 60
Please upvote if the answer is helpful.In case of doubt,do comment.Thanks.