You have found three investment choices for a one-year deposit: P 5-8 (similar t

Question

You have found three investment choices for a one-year deposit:

P 5-8 (similar to) Question Help You have found three investment choices for a one-year deposit 9.6% APR compounded monthly, 9.6% APR compounded annually, and 8.7% APR compounded daily. Compute the EAR for each investment choice. (Assume that there are 365 days in the year.) (Note: Be careful not to round any intermediate steps less than six decimal places.) The EAR for the first investment choice is | %. (Round to three decimal places.)

Explanation / Answer

Solution: The EAR for the first investment choice is 10.034% The EAR for the 2nd investment choice is 9.600% The EAR for the 3rd investment choice is 9.089% Working Notes: The EAR for the first investment choice 10.034% APR = 9.6% t= 1 year compounded monthly Effective Annual rate (EAR) = (1+r/m)^m -1 m is the number of compounding periods per year = no. of years x no of times compounded in a year = 1 x 12 =12 Effective Annual rate (EAR) = (1+r/m)^m -1 Effective Annual rate (EAR) = (1+9.6%/12)^12 -1 Effective Annual rate (EAR) =1.100338694 -1 Effective Annual rate (EAR) =0.100338694 Effective Annual rate (EAR) =10.034 % The EAR for the 2nd investment choice is 9.600% APR = 9.6% t= 1 year compounded annually Effective Annual rate (EAR) = (1+r/m)^m -1 m is the number of compounding periods per year = no. of years x no of times compounded in a year = 1 x 1 =1 Effective Annual rate (EAR) = (1+r/m)^m -1 Effective Annual rate (EAR) = (1+9.6%/1)^1 -1 Effective Annual rate (EAR) =1.096 -1 Effective Annual rate (EAR) =0.0960 Effective Annual rate (EAR) =9.600 % Notes: When compounded annually , its APR will be equal to the EAR = 9.600% The EAR for the 3rd investment choice is 9.089% APR = 8.7% t= 1 year compounded daily Effective Annual rate (EAR) = (1+r/m)^m -1 m is the number of compounding periods per year = no. of years x no of times compounded in a year = 1 x 365 =365 Effective Annual rate (EAR) = (1+r/m)^m -1 Effective Annual rate (EAR) = (1+8.7%/365)^365 -1 Effective Annual rate (EAR) = 1.090885371 - 1 Effective Annual rate (EAR) =0.090885371 Effective Annual rate (EAR) =9.088537 % Effective Annual rate (EAR) =9.089 % Please feel free to ask if anything about above solution in comment section of the question.

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