Problem $5\mathrm{.}27($Effective Versus Nominal Interest Rates$)$

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Bank A pays $5\%$ interest compounded annually on deposits, while Bank B pays $4\mathrm{.}25\%$ compounded daily.

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

I. You would choose Bank A because its EAR is higher.

II$.$ You would choose Bank B because its EAR is higher.

III. You would choose Bank A because its nominal interest rate is higher.

IV$.$ You would choose Bank B because its nominal interest rate is higher.

V$.$ You are indifferent between the banks and your decision will be based upon which one offers you a gift for opening an account.