Question

1(a) Your company is interested in deposing excess cash in a bank savings account that offers 3% interest per year, compounded daily. What is the effective interest rate per year?

Answer 1

Let the effective interest rate be r r = (1 + i/n)^n minus 1 r = effective interest rate n = no. of compounding period i = stated interest rate Here, i = 3% i = 0.03 n = 365 So, the formula for effective interest rate r = (1 + i/n)^n minus 1 = r = (1 + 0.03/365)^365 minus 1 = r = 0.03045 So, the effective interest rate be 3.045% r = 3.045 %