Final answer:
The bank compounds interest for this account monthly to achieve an EAR of 6.18% from an APR of 6%. The required answer is Option b. Monthly compounding.
Step-by-step explanation:
To determine how the bank compounds interest for an account with an APR of 6% and an EAR of 6.18%, we need to understand the relationship between these two rates. The Annual Percentage Rate (APR) refers to the yearly interest without taking compounding into account, while the Effective Annual Rate (EAR) accounts for the compounding periods within a year.
EAR can be calculated from APR using the formula EAR = (1 + APR/n)n - 1, where 'n' is the number of compounding periods per year. To match an APR of 6% with an EAR of 6.18%, the compounding frequency needs to be found where this equation holds true.
After performing calculations with the different compounding options provided, we can deduce that the option that would yield an EAR closest to 6.18% when the APR is 6% is monthly compounding. Therefore, the correct answer is b. Monthly compounding.