Five banks offer nominal rates of 6% on deposits; but A pays interest annually, B pays semiannually, C pays quarterly, D pays monthly, and E pays daily
1) What effective annual rate does each bank pay? If you deposit 5,000 in each bank today, how much will you have in each bank at the end of 1 year? 2 years?
2) If all of the banks are insured by the government (the FDIC) and thus are equally risky, will they be equally able to attract funds? If not (and the TVM is the only consideration), what nominal rate will cause all of the banks to provide the same effective annual rate as Bank A?
3) Suppose you don't have the 5,000 but need it at the end of 1 year. You plan to make a series of deposits-annually for A, semiannually for B, quarterly for C, monthly for D, and daily for E -with payments beginning today. How large must the payments be to each bank?
4) Even if the five banks provided the same effective annual rate, would a rational investor be indifferent between the banks? Explain