A newspaper carries advertisements for CD rates terms for f

A newspaper carries advertisements for CD rates / terms for four local banks. Which would be the best deal?

a.

Worker\'s Credit Union -- 4.10% compounded annually

b.

Scrooge Investments -- 4.00% compounded daily

c.

Omega Savings & Loan -- 4.00% compounded quarterly

d.

Cloverdale Bank & Trust -- 4.10% compounded quarterly

Solution

a)

EAR - effective annual rate

EAR = 4.10%

b)

EAR = ( 1 + 0.04/365)ˆ365 -1 = 4.08%

c)

EAR = (1 + 0.04/4)ˆ4 - 1 = 4.06%

d)

EAR = (1 + 0.041/4)ˆ4 - 1 = 4.16%

hence d) is the best deal