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29 April, 21:55

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

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  1. 29 April, 22:09
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    The bank account that will have the highest effective annual return is For an account that pays 8% nominal interest with daily (365-day) compounding.

    Explanation:

    let r be the nominal interest and n be the period.

    the effective rate of return = [ (1+r/n) ^n - 1]*100

    For an account that pays 8% nominal interest with daily (365-day) compounding.

    effective rate of return = [ (1+0.08/365) ^365 - 1]*100

    = 8.328%

    For An account that pays 8% nominal interest with monthly compounding.

    effective rate of return = [ (1+0.08/12) ^12 - 1]*100

    = 8.300%

    For An account that pays 8% nominal interest with annual compounding.

    effective rate of return = [ (1+0.08/1) ^1 - 1]*100

    = 8.000%

    For An account that pays 7% nominal interest with daily (365-day) compounding.

    effective rate of return = [ (1+0.07/365) ^365 - 1]*100

    = 7.250%

    For An account that pays 7% nominal interest with monthly compounding.

    effective rate of return = [ (1+0.07/12) ^12 - 1]*100

    = 7.229%

    Therefore, The bank account that will have the highest effective annual return is For an account that pays 8% nominal interest with daily (365-day) compounding.
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