Which one of the following investments provides the highest effective annual rate of return (i.e., which...

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Which one of the following investments provides the highesteffective annual rate of return (i.e., which of the followinginvestments is the BEST = the largest EAR) over an investmenthorizon of 10 years)?
a. An investment which has a 3.0 percent nominal rate withannual compounding.
b. An investment which has a 2.98 percent nominal rate withsemi-annual compounding.
c. An investment which has a 2.965 percent nominal rate withquarterly compounding.
d. An investment which has a 2.9575 percent nominal rate withmonthly compounding.
e. An investment which has a 2.955 percent nominal rate anddaily (365) compounding

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4.2 Ratings (804 Votes)

b. An investment which has a 2.98 percent nominal rate with semi-annual compounding.

a.	Effective annual rate of return	=	((1+i)^n)-1	Where,
	(EAR)	=	((1+0.03)^1)-1	i	Nominal rate of return	0.03
		=	3.000%	n	Number of times compounding in a year	1

b.	Effective annual rate of return	=	((1+(i/n))^n)-1	Where,
	(EAR)	=	((1+(0.0298/2))^2)-1	i	0.0298
		=	3.002%	n	2

c.	Effective annual rate of return	=	((1+(i/n))^n)-1	Where,
	(EAR)	=	((1+(0.02965/4))^4)-1	i	0.02965
		=	2.998%	n	4

d.	Effective annual rate of return	=	((1+(i/n))^n)-1	Where,
	(EAR)	=	((1+(0.029575/12))^12)-1	i	0.029575
		=	2.998%	n	12

e.	Effective annual rate of return	=	((1+(i/n))^n)-1	Where,
	(EAR)	=	((1+(0.02955/365))^365)-1	i	0.02955
		=	2.999%	n	365

So,
b. An investment which has a 2.98 percent nominal rate with semi-annual compounding has highest effective annual rate of return.

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Transcribed Image Text

Which one of the following investments provides the highesteffective annual rate of return (i.e., which of the followinginvestments is the BEST = the largest EAR) over an investmenthorizon of 10 years)?a. An investment which has a 3.0 percent nominal rate withannual compounding.b. An investment which has a 2.98 percent nominal rate withsemi-annual compounding.c. An investment which has a 2.965 percent nominal rate withquarterly compounding.d. An investment which has a 2.9575 percent nominal rate withmonthly compounding.e. An investment which has a 2.955 percent nominal rate anddaily (365) compounding