You have a savings account that pays 3.7% interest compounded semiannually, but

Question

You have a savings account that pays 3.7% interest compounded semiannually, but you are considering transferring your funds into a savings account that pays 3.4% interest compounded monthly. Calculate the difference in the effective interest rates of the two accounts. What is the difference in the effective interest rates of your existing and potential new accounts? (Express the rates in decimal form rounded to four decimal places. Subtract the EIR of the new account from the EIR of your existing account.) (Round to 4 decimal places.)

Explanation / Answer

Effective rate of interest

Hope this helps.

r = (1 + i / n)^n - 1

Effective rate of interest

Where r is effective rate of return
I is nominal rate of return
n is number of times the interest is compounded in a year when nominal rate is 3.7 compounded semiannually, the effective rate would be
r = 1+(.037 /2)^2 - 1 3.42% when nominal rate is 3.4 compounded monthly, the effective rate would be
r = 1+(.034 /12)^12 - 1 3.45%

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