Which of the following bank accounts has the lowest effective annual return?
A) An account that pays 8% nominal interest with monthly compounding.
B) An account that pays 8% nominal interest with annual compounding.
C) An account that pays 7% nominal interest with daily (365-day)compounding.
D) An account that pays 7% nominal interest with monthly compounding.
E) An account that pays 8% nominal interest with daily (365-day)compounding.

Question

Quizplus · Accepted Answer

By inspection,we can see that b must have a lower EFF% than either a or e because they all pay the same nominal rate but b is compounded least frequently.Similarly,c and d pay the same rate,but d is compounded less frequently,hence d must have the lower EFF%.So,the correct answer must be either b or d.It is not obvious which of these two has the lower EFF%,so we must do a quick calculation to determine the correct response.As the following calculations show,d is the correct answer. a.8.300% = (1 + 0.08/12)^12-1 b.8.000% = (1 + 0.08/1)^1-1 c.7.250% = (1 + 0.07/365)^365-1 d.7.229% = (1 + 0.07/12)^12-1 e.8.328% = (1 + 0.08/365)^365-1

Which of the Following Bank Accounts Has the Lowest Effective