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Effective rate of interest

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You are interested in investing your money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

a. Bank 1; 8 percent with monthly compounding.
b. Bank 2; 8 percent with annual compounding.
c. Bank 3; 8 percent with quarterly compounding.
d. Bank 4; 8 percent with daily (365-day) compounding.
e. Bank 5; 7.8 percent with annual compounding.

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The solution explains how to calculate the effective rate of interest.

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The effective rate increases as the compounding frequency increases. Of the choices, option d would have the highest effective rate since the nominal rate is highest ...

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