Question

Would a depositor prefer an APR of 8% with monthly compounding or an APR of 8.5% with semiannual compounding? • 8.0% with monthly compounding • The depositor would be indifferent. • The time period must be known to select the preferred account. • 8.5% with semiannual compounding

Answer 1

An APR of 8% with monthly compounding is preferred over an APR of 8.5% with semiannual compounding, as it results in a higher effective interest rate due to the increased frequency of compounding.

Step-by-step explanation:

The depositor would prefer an APR of 8% with monthly compounding as this results in a higher effective interest rate (EIR).

Annual Percentage Rate (APR) does not include compounding within a given year. APR becomes more useful when it's converted to the Annual Percentage Yield (APY), which factors in how often the interest is compounded either monthly or semiannually.

With an APR of 8% compounded monthly, the APY is approximately 8.30%, while an APR of 8.5% with semiannual compounding, the APY is approximately 8.64%. Therefore, the depositor would yield more with the 8% APR with monthly compounding.

Learn more about APR and Compounding