Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5% compounded daily. a.

Question:

Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5% compounded daily.

a. Based on the EAR (or EFF%), which bank should you use?

b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest.

Compounding
Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will...