medium · Principles of Finance time-value-of-money
An investor is comparing two savings accounts. Account X offers an APR of 12% with monthly compounding. Account Y offers an APR of 12.5% with annual compounding.
Which account provides a higher effective return?
- Both are identical because the difference between 12% and 12.5% is offset by the 12 periods.
- Account X, because its EAR is 12.68%.
- Account X, because monthly compounding always doubles the nominal rate over time.
- Account Y, because 12.5% is numerically higher than 12%.
Sign up free to see the explanation and track your rank →
More Principles of Finance time-value-of-money practice
- Which loan has the higher effective annual rate (EAR)?
- What is the Multiple of Invested Capital (MOIC) for the equity investors?
- What is the net profit per share for the investor?
- According to the Pecking Order Theory, which of the following is a firm's least preferred
- If the WACC is 10%, what is the Equivalent Annual Annuity (EAA) of Project A?
- A perpetuity pays $100 every year forever. If the discount rate is 8%, what is the present
- Using the formula for future value, what will the account balance be after 10 years?
- What is the primary difference between an 'Ordinary Annuity' and an 'Annuity Due'?