Consider the following investment alternatives:

Investment Rate Compounding

A 6.858 % Annual

B 6.6571 % Daily

C 6.7359 % Quarterly

D 6.722 % Monthly

The lowest effective rate of return you could earn on any of these investments is closest to:

Lowest effective interest rate

A 6.858%

B 6.883%

C 6.908%

D 6.933%

Explanation:

Effective rate is the rate of interest that actually earned or paid on any investment or on a loan. It also measure the compounding effect on the investment.

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

A

6.858 % Annual

r = 6.858 %

B

6.6571 % Daily

Assuming 365 days

r = (1 + 6.6571%/365) ^365 - 1 = 6.883%

C

6.7359 % Quarterly

r = (1 + 6.7359%/4) ^4 - 1 = 6.908%

D

6.722 % Monthly

r = (1 + 6.722%/12) ^12 - 1 = 6.933%