Determine which is the better investment: 5.2% compounded semiannually or 5.36% compounded quarterly. Round your answers to 2 decimal places. The 5.2% semiannual investment gives an effective rate of %. The 5.36% quarterly investment gives an effective rate of%. Therefore, the (Choose one) investment is a better investment.
Determine which is the better investment: 5.2% compounded semiannually or 5.36% compounded quarterly. Round your answers to 2 decimal places. The 5.2% semiannual investment gives an effective rate of %. The 5.36% quarterly investment gives an effective rate of%. Therefore, the (Choose one) investment is a better investment.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:### Investment Comparison: Semiannual vs. Quarterly Compounding
#### Determining the Better Investment: 5.2% Compounded Semiannually vs. 5.36% Compounded Quarterly
You are tasked with determining which investment yields a better effective annual rate (EAR). Compare a 5.2% interest rate compounded semiannually with a 5.36% interest rate compounded quarterly. Ensure to round your answers to two decimal places.
1. **Effective Annual Rate Calculation for 5.2% Compounded Semiannually:**
The 5.2% semiannual investment gives an effective rate of ____.%.
2. **Effective Annual Rate Calculation for 5.36% Compounded Quarterly:**
The 5.36% quarterly investment gives an effective rate of ____.%.
3. **Decision:**
Therefore, the (Choose one) investment is a better investment.
*Use the drop-down menu to indicate which investment option is superior based on the calculated Effective Annual Rate (EAR).*
#### Explanation of Effective Annual Rate (EAR)
The Effective Annual Rate (EAR) is a measure of how much interest will be earned on an investment, taking into account the effect of compounding. It's a more accurate representation of the investment's true return.
To calculate the EAR for each compounding method:
- For semiannual compounding: Use the formula EAR = (1 + (i/n))^n - 1 where i is the nominal rate and n is the number of compounding periods per year.
- For quarterly compounding: Use the same formula adjusting n accordingly.
Make sure your final results correctly display the effective interest rates and make a well-informed decision regarding the better investment option.
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