Final answer:
To determine which savings account is better, the compounding effect of the Saco Bay Savings Bank's account must be compared against the simple interest of the Nonesuch Bank's account. Calculating the effective annual rate (EAR) for Saco Bay Savings Bank and comparing it to the nominal rate offered by Nonesuch Bank will show which account yields more interest over the year.
Step-by-step explanation:
The question asks which savings account is better: one offered by Saco Bay Savings Bank with a nominal rate of 2.94% compounded daily, or one offered by Nonesuch Bank with a nominal rate of 2.9835% but no compounding within the year. To determine which is better, we should consider the effect of compounding interest compared to simple interest.
Compounding daily means that the interest is calculated and added to the account balance every day, which results in more interest over time compared to simple interest, where interest is only calculated at the end of the year. Despite the slightly higher nominal rate offered by Nonesuch Bank, the effect of daily compounding at Saco Bay Savings Bank could potentially result in a higher effective annual rate (EAR).
To accurately compare the two accounts, one would calculate the EAR for Saco Bay Savings Bank's account using the following formula: EAR = (1 + nominal rate / 365)^(365) - 1. If the EAR for Saco Bay Savings Bank's account is higher than 2.9835%, it would be the better option. Financial investors often consider such factors, as seen in the comparison between savings accounts and CDs, where CDs typically offer slightly higher rates to compensate for less liquidity.