Final answer:
To rank compounding periods by their effective annual rates, more frequent compounding results in higher rates. The correct ranking is Daily, Monthly, Quarterly, and Annually, with daily compounding having the highest effective annual rate.
Step-by-step explanation:
The student is asking about ranking the effective annual rates when different compounding periods are considered, specifically daily, monthly, quarterly, and annually. To rank the compounding periods from highest to lowest effective annual rate, we look at how frequently the interest is compounded. The more frequent the compounding, the higher the effective annual rate, because each compounding period adds interest to the previous interest, causing the investment to grow more quickly due to what's known as the compounding effect.
Therefore, the ranking from highest to lowest effective annual rate is:
- Daily compounding
- Monthly compounding
- Quarterly compounding
- Annually compounding
This is because the interest in daily compounding is compounded more times in a year than in monthly, which in turn is compounded more than quarterly, and finally, annually compounded interest is only compounded once a year.