Question
Periodic interest rates. You have a savings account in which you leave the funds for one year without
adding to or withdrawing from the account. Which would you rather have: a daily compounded rate of
compounded rater of
of
What is the effective annsal rate (EAR) of a daily compounded rate of
96 (Round to two decimal places.)
adding to or withdrawing from the account. Which would you rather have: a daily compounded rate of
compounded rater of
of
What is the effective annsal rate (EAR) of a daily compounded rate of
96 (Round to two decimal places.)
Ask by Howell Schmidt. in the United States
Jan 24,2025
Upstudy AI Solution
Tutor-Verified Answer
Answer
The effective annual rate (EAR) of a daily compounded rate of 0.055% is 0.055%.
Solution
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Extra Insights
To determine which compounding rate is most beneficial, it’s crucial to calculate the Effective Annual Rate (EAR) for each compounding frequency. The EAR for daily compounding at a rate of
where
Using a calculator, you get:
This is significantly lower than annual rates such as
Now let’s explore the great stories behind compound interest! The concept of compound interest dates back to ancient civilizations where merchants and traders rewarded lenders for keeping their money in savings. Even Albert Einstein famously called compound interest “the eighth wonder of the world.”
To get the most out of your compounding interest, always check how often your bank compounds interest. Daily compounding sounds enticing but small rates can accumulate weighty sums when left to do their thing! Always ensure you’re comparing apples to apples by converting all interest rates to EAR for a fair assessment.
