Question

An online bank is offering to pay 0.25 % interest per month on deposits. Your local bank offers to pay 0.75 % interest quarterly (every 3 months). Which is the higher interest rate? (Round to four decimal places)

The EAR for the online bank is ____
The EAR for the local bank is ____

Answer 1

After calculating the EAR for both banks, the online bank's EAR of 3.04% is slightly higher than the local bank's EAR of 3.02%, making the online bank's offer better in terms of interest earnings.

Step-by-step explanation:

To determine which bank offers the higher effective annual rate (EAR), we can use the given monthly and quarterly interest rates. For the online bank with a monthly rate of 0.25%, the EAR can be calculated using the formula (1 + monthly interest rate)12 - 1. This equates to (1 + 0.0025)12 - 1. For the local bank with a quarterly rate of 0.75%, the EAR is (1 + quarterly interest rate)4 - 1, resulting in (1 + 0.0075)4 - 1. Calculating both values gives:

• EAR for the online bank = (1 + 0.0025)12 - 1 ≈ 0.0304 or 3.04%
• EAR for the local bank = (1 + 0.0075)4 - 1 ≈ 0.0302 or 3.02%

After rounding to four decimal places, the EAR for the online bank is slightly higher than that of the local bank.