You have a savings account that pays 3.4% interest compounded semiannually, but

Question

You have a savings account that pays

3.4% interest compounded semiannually, but you are considering transferring your funds into a savings account that pays 3.1% 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.)

Explanation / Answer

The effective interest rate in existing account = (1 + 0.034/2)^2 - 1

= 3.43%

The effective interest rate in potential account = (1 + 0.031/12)^12 - 1

= 3.14%

The difference in the effective interest rates of the existing and potential new account = 3.14 - 3.43 = -0.29%

= - 0.0029

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