Which account has the highest effective annual interest rate? Not necessary but please show how you got your answer.A. Account 1: Interest is compounded quarterly at an annual rate of 4.20%.B. Account 2: Interest is compounded monthly at an annual rate of 4.15%.C. Account 3: Interest is compounded semiannually at an annual rate of 4.10%D. Account 4: Interest is compounded annually at a rate of 4.25%.
Accepted Solution
A:
Answer: A. 4.20% compounded quarterlyStep-by-step explanation:The effective annual multiplier on an account with annual interest rate r compounded n times per year is ... (1 +r/n)^nWhen doing multiple evaluations of the same expression, it is convenient to let a spreadsheet or calculator do them from a list of inputs. In the attached, we round the result to 4 decimal places to make comparison easier.The highest effective rate is 4.2% compounded 4 times per year.____Example calculation (1 +0.042/4)^4 = 1.0105^4 = 1.0426661426550625 ≈ 1.0427