easy · Certified Financial Planner General Principles
The Ellison household is comparing two investment options. Option 1 offers 6.2% compounded daily. Option 2 offers 6.3% compounded annually.
Based purely on the Effective Annual Rate (EAR), which option is superior?
- Option 2, because 6.3% is higher than 6.2%.
- Option 1, because its periodic rate is 0.017%.
- Both options are identical because 0.1% is the standard rounding error.
- Option 1, with an EAR of approximately 6.40%.
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