Answer:
lowest effective annual return
b. An account that pays 7% nominal interest with monthly compounding
Explanation:
The reasoning is because lesstimes a rate compounds, less interest it generated:
So between daily and monthly compounding, the lower effective rate is monthly compounding
The Compound interest formula:
[tex]Principal * (1+ r)^{time} = Ammount[/tex]
The compound interest with subperiodic compounds:
[tex]Principal * (1+ \frac{r}{n} )^{time* n} = Ammount[/tex]
Assuming time and Principal equal to 1 and we got:
[tex](1+ r) = Ammount[/tex]
and
[tex](1+ \frac{r}{n} )^{n} = Ammount[/tex]
Using your numbers, you will notice that as more subperiodic compounds, the more it grows the ammounts.
Resuming: at equal rate and principal, the most compunding has higher effective rate.
