Question

You have found three investment choices for a​ one-year deposit: 9.4 %9.4% APR compounded​ monthly, 9.4 %9.4% APR compounded​ annually, and 8.7 %8.7% APR compounded daily. Compute the EAR for each investment choice.​ (Assume that there are 365 days in the​ year.) ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.)

Answer 1

Answer and Explanation:

The computation of EAR for each investment is shown below:-

EAR = ((1 + APR ÷ m)^m) - 1

where m indicates compounding periods

Now we will put the values with the help of the above formula

For 9.4% APR compounded monthly is

EAR = ((1 + 0.094 ÷ 12)^12) - 1

= 9.815747%

For 9.4% APR compounded annually is

EAR = ((1 + 0.094 ÷ 1)^1) - 1

= 9.400000%

For 8.7% APR compounded daily is

EAR = ((1 + 0.087 ÷ 365)^365) - 1

= 9.088537%