Savings account A and savings account B both offer APRs of 4%, but sav

QUESTION

Savings account A and savings account B both offer APRs of 4%, but savings account A compounds interest quarterly, while savings account B compounds interest monthly. Which savings account offers the higher APY?
A. Savings account B, because it has fewer compounding periods per year
B. Savings account A, because it has more compounding periods per year
C. Savings account A, because it has fewer compounding periods per year
D. Savings account B, because it has more compounding periods per year
Solution: Option D is correct. Saving accounts B offers the higher APY becauseit has more compounding periods per year. Annual Rate = 2% For Account A: Compounded Quarterly: Effective Annual Rate = ((1+Annual¦

^n) -1 = (1+4%/4)^4 “ 1 = 2.015% For Account B: Compounded Monthly: Effective Annual Rate = ((1+Annual Rate/n)^n) -1 = (1+4%/12)^12- 1 = 2.0184%

ANSWER:

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