select the correct answer. which account has the highest annual interest rate? a. account 1: interest is…

Explanation:

Step1: Recall compound - interest formula for effective annual rate (EAR)

$EAR=(1 + \frac{r}{n})^{n}-1$, where $r$ is the annual percentage rate (APR) and $n$ is the number of compounding periods per year.

Step2: Calculate EAR for Account 1

Since it is compounded annually ($n = 1$) and $r=0.0328$, $EAR_1=(1+\frac{0.0328}{1})^{1}-1 = 0.0328$ or $3.28%$.

Step3: Calculate EAR for Account 2

Compounded monthly ($n = 12$) and $r = 0.0325$, $EAR_2=(1+\frac{0.0325}{12})^{12}-1\approx1.0329 - 1=0.0329$ or $3.29%$.

Step4: Calculate EAR for Account 3

Compounded weekly ($n = 52$) and $r = 0.0310$, $EAR_3=(1+\frac{0.0310}{52})^{52}-1\approx1.0315 - 1=0.0315$ or $3.15%$.

Step5: Calculate EAR for Account 4

Compounded daily ($n = 365$) and $r = 0.0315$, $EAR_4=(1+\frac{0.0315}{365})^{365}-1\approx1.0320 - 1=0.0320$ or $3.20%$.

Step6: Calculate EAR for Account 5

Compounded quarterly ($n = 4$) and $r = 0.0325$, $EAR_5=(1+\frac{0.0325}{4})^{4}-1\approx1.0328 - 1=0.0328$ or $3.28%$.

Answer:

B. Account 2: Interest is compounded monthly at a rate of 3.25%.