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Question:
Frank Jones is considering three separate investments. Investment 1 pays a stated annual interest rate of 6.1%, compounded annually. Investment 2 pays a stated annual interest rate of 6.0%, compounded monthly. Investment 3 pays a stated annual interest rate of 5.9%, compounded quarterly. Which investment should Smith choose?
A
Investment 2.
explanation
1212Because Investment 1 is compounded annually, its effective annual interest rate is equal to the stated annual rate of 6.1%. Investment 2 has an effective annual interest rate equal to:
Investment 3 has an effective annual interest rate equal to:
Jones should choose Investment 2 since it has the highest effective annual interest rate.
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