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%.
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