CA Foundation · Quantitative Aptitude · Mathematics of Finance
Bank A offers 8% per annum compounded half-yearly. Bank B offers 8.2% per annum compounded annually. Which is the better option for a depositor, and what is the effective rate for Bank A?
Bank B is better. Bank A's effective rate is (1.04)^2 - 1 = 8.16%, while Bank B's annually compounded 8.2% is its effective rate. Since 8.2% exceeds 8.16%, Bank B gives the depositor more interest.
- ABank B; Bank A's effective rate is 8.16%Correct
- BBank A; its effective rate is 8.16%
- CBank A; its effective rate is 8.40%
- DBank B; Bank A's effective rate is 8.00%
Explanation
Bank A: (1.04)^2 - 1 = 1.0816 - 1 = 8.16%. Bank B's effective rate is 8.2%, which is higher than 8.16%. So Bank B is better. Option with 8.40% wrongly adds a double count of interest.
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