Sally wishes to open a savings account. Citizens bank offers a savings account that compound monthly at interest rate of 2% per year.

Question

Empire bank offers a savings account that compounds quarterly at an interest rate of 3% per year.

 

a) Calculate the effective rate of interest for each savings account.

 

b) which savings account should sally choose? 

Answer 1

The formula is:

r_effective = (1 + r_nominal/periods)^periods - 1

 

For Citizens that is

 

r = (1 + 0.02/12)¹² - 1

 

Can you calculate each and answer?