Answer:
Therefore depositor would prefer an APR of 8.5% with semiannual compounding
Step-by-step explanation:
First determine the Effective Interest Rate of the two Returns, then compare the Rates.
The Effective Annual Rate of Interest is the Annual rate that if compounded once a year, would give us the same result as the interest per period compounded a number of times.
1. APR of 8% with monthly compounding
Calculation of Effective Annual Rate of Interest using a Financial Calculator:
8 % Shift NOM %
12 Shift P/YR
Shift EFF % = 8.3 %
2. APR of 8.5% with semiannual compounding
Calculation of Effective Annual Rate of Interest using a Financial Calculator:
8.5 % Shift NOM %
2 Shift P/YR
Shift EFF % = 8.6806 or 8.68 %
Conclusion.
Choose the APR giving greater Effective Annual Rate.
Comparing the 2 Effective Annual Rate of Interest, it can be seen that an APR of 8.5% with semiannual compounding gives a greater Effective Annual Rate of Interest.
Therefore depositor would prefer an APR of 8.5% with semiannual compounding