Jennifer and Rex both receive a dividend from their 401(k) retirement plan every 6 months. The earning rates for this year have been 5% per year, compounded quarterly for Jennifer, and 4.85% per year, compounded monthly for Rex. Rex felt good about this because he knew the monthly compounding on his plan would make his APY higher than Jennifer’s APY. (a) Is Rex correct? Explain your answer. (b) What is the effective rate for each plan on the basis of the payment period?
Jennifer and Rex both receive a dividend from their 401(k) retirement plan every 6 months. The earning rates for this year have been 5% per year, compounded quarterly for Jennifer, and 4.85% per year, compounded monthly for Rex. Rex felt good about this because he knew the monthly compounding on his plan would make his APY higher than Jennifer’s APY. (a) Is Rex correct? Explain your answer. (b) What is the effective rate for each plan on the basis of the payment period?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Jennifer and Rex both receive a dividend from
their 401(k) retirement plan every 6 months. The
earning rates for this year have been 5% per year,
compounded quarterly for Jennifer, and 4.85% per
year, compounded monthly for Rex. Rex felt good
about this because he knew the monthly compounding
on his plan would make his APY higher
than Jennifer’s APY.
(a) Is Rex correct? Explain your answer.
(b) What is the effective rate for each plan on the
basis of the payment period?
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